China seen tapping brakes on weak yuan for now after key level breached

SHANGHAI, July 19 (Reuters) - China's yuan edged up against
the dollar on Tuesday after breaching the key level of 6.7 per
dollar in the previous session, with state banks stepping in to
control the slide.
    Many market watchers expect the central bank will allow the
yuan to weaken further in coming months if the economy continues
to struggle, though some believe it may allow a more gradual
decline after a sharp 3 percent fall so far this year.
    While China's second-quarter economic growth data on Friday
was slightly stronger than expected due to growing central
government support, exports continued to fall and investment is
cooling rapidly, keeping fears of capital outflows alive.
    The yuan slipped below the psychologically important 6.7
level for the first time in more than five years on Monday after
state-bank support for the currency tapered off in late trade. 
    On Tuesday, spot yuan opened at 6.7011 and was at
6.6988 at midday, up 0.05 percent from the previous close.
    The yuan's sharp decline over the last year has added to a
wall of worry for investors already rattled by slowing global
economic growth and the potential fallout from Britain's
decision to leave the European Union.
    Fitch Ratings warned on Tuesday that China's increasing
reliance on debt-fuelled stimulus was also adding to the risks
facing its banking system.        
    The yuan's brief slide past the 6.7 milestone came on the
eve of the U.S. Republican National Convention, where
presumptive presidential nominee Donald Trump is to be formally
announced. In June, Trump called China a "grand master" of
currency devaluations and urged a tax on imports. 
    It also comes just days before China hosts G20 finance
ministers and central bank governors, who in April reaffirmed a
pledge to refrain from competitive devaluations and not set
exchange rates for competitive purposes.
    Chinese authorities typically have held the yuan steady
during similar high-level diplomatic events in the past.
    Beijing has said repeatedly in the past that it won't use
the yuan to gain a trade advantage, adding it is committed to
continue "market-oriented exchange rate reform" of the yuan.
    Since the shock Brexit vote on June 23 roiled global
markets, China has allowed the yuan to fall about 1.8 percent
against the dollar and more than 1 percent against a basket of
currencies of its main trading partners.
    On Tuesday, the People's Bank of China set the midpoint rate
 at 6.6971 per dollar prior to the open, only 0.01
percent weaker than the previous day's fix of 6.6961.
    Traders and analysts said Tuesday's midpoint was firmer than
their models suggested, with one trader saying the official
guidance rate missed his bank's estimate by over 50 pips.
    The central bank sets the midpoint each day based on a
number of factors, including the previous day's rate, but it is
widely believed to have a degree of discretion to move the rate
up or down as it sees fit. 
    Traders said state banks were determined to defend the yuan
at 6.6990 on Tuesday by selling dollars.
    "It seems to me China's central bank has put a brake on CNY
depreciation, at least temporarily," Zhou Hao, senior emerging
markets economist at Commerzbank AG in Singapore, said in a
    "Market outlooks on the yuan are diverging at this point,
with some saying the firm stance from the central bank showed
not much room for further depreciation, but others seeing more
in coming months," said a trader at a European bank in Shanghai.
    Quoting policy sources, Reuters reported earlier this month
that Beijing would tolerate a fall in the yuan to as low as 6.8
per dollar in 2016. That would equate to fall of 4.5 percent for
the year, the same as last year's record decline. 
    A Reuters replica tracking the index for the yuan's value
against a trade-weighted basket of 13 currencies stood at 94.44
on Tuesday, down 6.44 percent for the year.
    Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital
Markets in Hong Kong, said in light of the possibility that
Trump might win the U.S. election in November, now was not a bad
time to let the yuan shed some value.
    "If that's the case and I were a Chinese policymaker, I
would let the currency move sooner rather than later," said Lai.
    Yuna Park, currency and bond analyst at Dongbu Securities in
Seoul, expects the yuan to weaken to 6.8-6.9 by year end.
    "The PBOC is unlikely to stop the yuan's weakness although
it may slow down the speed of depreciation. Although China
emphasises domestic demand, the economy is still
    "Other emerging Asian countries may want their currencies to
be weaker to improve their current accounts. They will not use
foreign exchange reserves (to support their currencies)."
    The offshore yuan was trading 0.18 percent softer
than the onshore spot at 6.7108 per dollar. The central bank was
suspected of intervention in the offshore market last week to
ease depreciation pressure on the Chinese currency. 
    The Financial News, a paper owned by China's central bank,
said on Monday that the yuan is to remain relatively stable.

    The yuan market at a glance: 
 Item               Current  Previous  Change
 PBOC midpoint      6.6971   6.6961    -0.01%
 Spot yuan          6.6988   6.7019    0.05%
 Divergence from    0.03%              
 Spot change YTD                       -3.06%
 Spot change since 2005                23.55%
*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 percent from official midpoint rate it sets each

 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.7108    -0.18%
 Offshore              6.852     -2.26%
*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 the Shanghai Newsroom and Nathaniel Taplin;
Editing by John Ruwitch and Kim Coghill)