China's yuan gains but market fears more weakness

China's yuan briefly hit a one-week high on Wednesday as some investors used recent weakness in the currency to add positions, though the broader market remained unconvinced the yuan's rise is sustainable. -- FILE PHOTO: REUTERS
China's yuan briefly hit a one-week high on Wednesday as some investors used recent weakness in the currency to add positions, though the broader market remained unconvinced the yuan's rise is sustainable. -- FILE PHOTO: REUTERS

HONG KONG (Reuters) - China's yuan briefly hit a one-week high on Wednesday as some investors used recent weakness in the currency to add positions, though the broader market remained unconvinced the yuan's rise is sustainable.

In a reflection of how expectations towards the Chinese currency have swung in recent weeks, the offshore yuan in Hong Kong was trading near its biggest discount to the onshore rate since the market began in 2010.

Typically, the offshore yuan in Hong Kong trades at a premium to its onshore cousin because of the lack of a deep pool of deliverable yuan assets outside the mainland.

But in recent days, the offshore yuan or CNH as it is commonly known has begun to trade at a discount as some investors have begun to bet on a weaker currency in the backdrop of a spreading slowdown in the economy.

"Not many expect the yuan to appreciate sharply this year given the economic slowdown and the offshore market is reflecting that sentiment," said a senior currency strategist at a bank in Hong Kong.

On Wednesday, the People's Bank of China (PBOC) set the mid-point at 6.1653, in line with bank models and a shade lower than Tuesday's fixing of 6.1636 per dollar.

At midday, spot yuan was changing hands at 6.2281, mostly unchanged from yesterday's close. It briefly hit a high of 6.2230, its highest level since last Wednesday.

China's central bank engineered two phases of yuan weakness in February and April and widened its currency trading band to 2 per cent on either side in March in an attempt to squash speculative bets on the currency.

While the more than 3 percent fall in the renminbi has deterred speculators and companies it has also invited criticism from its trading partners such as the United States who have raised concern about the lack of transparency.

But market watchers believe Beijing may let the currency weaken further if authorities fear economic conditions will deteriorate, even though some policymakers have publicly denied the need for large-scale stimulus measures.