SHANGHAI, June 1 (Reuters) - China's yuan clawed back earlier losses on Tuesday taken after authorities ordered banks to increase their foreign exchange holdings, although investors are wary of further moves by policymakers to rein in a rising currency. The People's Bank of China (PBOC) said on Monday it would raise the FX reserve requirement ratio for financial institutions to 7% from 5%, from June 15, its first such move in 14 years. While the shift was widely seen aimed at reining in fast yuan appreciation, analysts said it would have very limited impact on the currency, amounting to a withdrawal of just $20 billion of long-term dollar liquidity from the banking system, compared with deposits of $1 trillion. Prior to the central bank's move on Monday, the yuan had hit a three-year high against the dollar. "It is certainly not a game changer," said Tommy Xie, head of Greater China research at OCBC Bank in Singapore. "However, we think the announcement sent a signal to the markets that there are enough tools in central bank's toolbox to curb RMB's one-way movement expectation even though the PBOC has exited the direct intervention." Prior to market opening, the PBOC set the midpoint rate at a new three-year high of 6.3572 per dollar, 110 pips or 0.17% firmer than the previous fix of 6.3682. The onshore spot yuan opened at 6.3660 per dollar and was changing hands at 6.3705 at midday, 5 pips firmer than the previous late session close. Despite a slight rebound, the spot market traded in a thin range of less than 100 pips on Tuesday morning, as investors were wary of additional policy moves if the local unit strengthened at a rapid pace again, said a trader at a foreign bank. "While this policy will lock in a certain amount of capital inflow and make foreign exchange funding costs higher, its effectiveness remains in doubt," Citi analysts said in a note. "We think the fundamental factors supporting a strong RMB have not changed." Similarly, Xing Zhaopeng, senior China strategist at ANZ in Shanghai, said the move should only "slow the pace of yuan appreciation" while expecting 6.3 as the ceiling for the yuan this year. Against the backdrop of recent higher volatility in the Chinese yuan, several banking sources said they had been advised by the FX regulator to guide their corporate clients to hedge FX exposures, despite cost of hedging climbing higher. One-year dollar/yuan swap, a gauge that measure the cost of FX hedging onshore, stood at around 1,535 pips and implied a yield of 2.45%, which is higher than the average onshore interbank repo rate, analysts at HSBC said in a note. "There is room for this to fall, in our view. Once FX swap points fall to a level that is less costly for importers and other hedgers, we could see more USD demand in the forwards space," they added. The yuan market at 0403 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.3572 6.3682 0.17% Spot yuan 6.3705 6.371 0.01% Divergence from 0.21% midpoint* Spot change YTD 2.48% Spot change since 2005 29.92% revaluation Key indexes: Item Current Previous Change Thomson 97.97 98.28 -0.3 Reuters/HKEX CNH index Dollar index 89.782 89.791 0.0 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.37 0.01% * Offshore 6.5358 -2.73% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Winni Zhou and Andrew Galbraith; Editing by Sam Holmes)
Our Standards: The Thomson Reuters Trust Principles.