UPDATE 1-Chinese yuan fall deepens on offshore markets, down 1 percent to dollar since Monday

Fri Feb 21, 2014 7:31am EST

By Patrick Graham and Sujata Rao

LONDON Feb 21 (Reuters) - China's yuan currency weakened to its lowest level since early October in offshore trade on Friday , extending a central bank-sponsored slide that has rattled foreign investors and left questions about Beijing's intentions.

One of the safest bets for global investors in recent years has been a steady gain for the yuan, or renminbi, long seen as artificially undervalued by state controls and traded by foreign investors in a complex system of offshore and forward rates.

Signs of weakening in the world's second biggest economy have underpinned a change in recent weeks and the People's Bank of China has set lower guidance rates for a market still complicated by the lack of full convertibility of the currency.

The move on Friday was the biggest one day fall since October 2011, Reuters data showed. In European trade, the currency fell past 6.10 yuan per dollar, bringing its losses since Monday to more than 1 percent.

"This is one of the most crowded positions in emerging markets, being long yuan versus the dollar," said Manik Narain, an emerging market strategist at UBS in London.

"In the past few sessions the PBOC has been guiding the midpoint of the daily U.S. fix higher so there has been a bit of a washout of positioning. It caught a lot of people off guard."

Rates on offshore markets, an important tool for companies doing business directly with China and where the yuan trades only in electronic terms, have always differed from the hard currency value of the yuan in China.

But they still follow it closely and the shift in central bank guidance rates, as well as reports that the PBOC has asked major state-owned banks to buy dollars, have pushed the offshore yuan lower.

Most analysts, however, assume Beijing will not seek any deeper weakening of the currency given long standing criticism from the United States of the yuan's failure to appreciate and the risk of a resulting boost in domestic inflation.

"We don't think this is the big one," analysts from French bank BNP Paribas said in a note on Friday.

"An outright devaluation of the (renminbi), or a depreciation trend is not in PBOC's interest. It would spring a new shock on the economy by raising the short-term cost of capital in the inter-bank market, and deal a blow to its agenda of internationalising the (renminbi)."

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