HONG KONG, July 31 (Reuters) - The yuan climbed against a lacklustre U.S. dollar on Friday, setting it on course for the best month in nine, as China's economy and financial markets showed further signs of recovery. The onshore yuan strengthened 0.3% to 6.9886 per dollar by midday, slightly trimming some of its earlier gains. The offshore yuan firmed 0.13% to 6.9920. The yuan is up 1.1% both onshore and offshore from the previous month, set for its best monthly gain since last October. The Chinese currency has been underpinned by weakness in the dollar, having its worst month in a decade on economic woes in the United States as a surge in coronavirus cases threatens to disrupt economic activity. Investment flows into Chinese stocks and bonds in July also aided the yuan, said Khiem Do, head of Greater China investments at Barings. "This is because Asia, led by China, is showing stronger and more sustainable growth compared with other regions, despite some spikes in the second and third waves of COVID-19 virus." Chinese stocks are heading for their best month since last February. In another sign of rebound from the coronavirus shutdowns, China's factories stepped up activity in July for a fifth straight month. But policymakers are not taking their feet off the pedal, vowing on Thursday to keep policy supportive in the second half amid a "severe and complex" economic situation. However, forex demand from overseas-listed Chinese companies for dividend payments and brewing Sino-U.S. tensions capped the yuan's rise against the U.S. dollar, traders said. The yuan, however, fell against other currencies which also gained on the greenback's woes. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies, traded at 91.06, its lowest level since last October. The People's Bank of China set the midpoint rate at 6.9848 prior to market open, softer than Reuters' estimate of 6.9781. The yuan market at 0400 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.9848 6.9902 0.08% Spot yuan 6.9886 7.0096 0.30% Divergence from 0.05% midpoint* Spot change YTD -0.36% Spot change since 2005 18.43% revaluation Key indexes: Item Current Previous Change Thomson 91.06 91.37 -0.3 Reuters/HKEX CNH index Dollar index 92.64 92.794 -0.2 *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 6.992 -0.05% * Offshore 7.1294 -2.03% 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 Noah Sin; Editing by Jacqueline Wong)
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