China's yuan rebounds on PBOC guidance, but weakness seen lingering

SHANGHAI (Reuters) - China's yuan rebounded against the dollar on Monday after the central bank firmed its official midpoint for the fourth straight trading day, a signal that the monetary authorities may hope to keep the Chinese currency relatively stable for now.

But the rebound appeared weak given a subtle change in the state of dollar supply and demand in the domestic market after the yuan has weakened for more than three months in a row, traders said.

"Corporate sentiment towards the yuan has turned sour," said a trader at a Chinese commercial bank in Shanghai. "Besides, it appears that capital inflows into China are slowing as well after lingering weakness in the yuan."

Spot yuan stood at 6.2483 per dollar at midday, up 0.08 per cent from Friday's close after the People's Bank of China (PBOC) set its midpoint at 6.1565, up 0.02 per cent from Friday.

The gap between the spot rate and the fixing reached as high as 1.5 per cent on Monday. That was slightly short of an all-time high of 1.6 per cent on Friday, when the yuan also hit a six-month low for the third straight day, at 6.2583.

Despite the recent slightly stronger midpoints, traders widely expect the PBOC not to take further action one way or the other in the currency until mid-May, when China publishes foreign trade data for April.

However, judging from the current conditions, the PBOC may have to reverse its stance and start supporting the yuan again after driving it down via major state-owned banks earlier this year, traders said.

The yuan has depreciated 3.1 per cent versus the dollar so far this year after the PBOC guided the currency weaker starting in mid-January, which traders and economists said was a move to deter speculators from betting on a one-way appreciation.

The PBOC never said it was deliberately pushing the yuan down, but currency dealers who spoke to Reuters said they suspected the drop was driven primarily by China's "Big Four"state-owned banks, who started buying up dollars in the domestic foreign exchange market at the central bank's behest.

But the central bank has more recently no longer intervened to depress the yuan. In a few cases, state banks have been seen even selling dollars to support the yuan's value in recent weeks, traders said.