Yuan inches higher on heavy corporate dollar selling

SHANGHAI, July 21 (Reuters) - The yuan inched higher on Wednesday as the greenback paused after its recent rallies and as Chinese companies ramped up dollar selling.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4835 per dollar, 20 pips firmer than the previous fix of 6.4855.

In the spot market, onshore yuan opened at 6.4800 per dollar and was changing hands at 6.4758 at midday, 86 pips firmer than the previous late session close.

Several market participants said gains in the yuan starting on Tuesday were supported by heavy dollar selling from corporates and major state-owned banks, prompting some to speculate if authorities were trying to slow the pace of recent yuan weakness and prevent it from breaking through the psychologically important 6.5 per dollar level.

China's major state-run banks often act as agents for the central bank in the country's FX market, but they also trade on their own behalf.

Meanwhile, the rebound in the yuan has pushed the its value against its rivals to a more than 5-year high. Yuan's basket index, as measured by the China Foreign Exchange Trade System (CFETS) index, rose to 98.55 on Wednesday, up nearly 4% so far this year, according to Reuters' calculations based on official data.

While many analysts and traders worry that too high an index could weigh on China's export competitiveness, Li Liuyang, chief FX analyst China Merchants Bank, said the effect should be the opposite.

"This round of risk aversion sentiment was driven by worries over the pandemic outbreak, and China does a relatively better job controlling the epidemic. Therefore, in the mid- and long-term, it should have a positive impact on China's exports," he said, adding the yuan may weaken less against the dollar while continue to rise versus its peers.

The global dollar index stood at 93.029 by midday, when the offshore yuan was trading at 6.4782 per dollar.

The yuan market at 0405 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.4835 6.4855 0.03%

Spot yuan 6.4758 6.4844 0.13%

Divergence from -0.12%

midpoint*

Spot change YTD 0.81%

Spot change since 2005 27.81%

revaluation

Key indexes:

Item Current Previous Change

Thomson 98.63 98.44 0.2

Reuters/HKEX

CNH index

Dollar index 93.029 92.965 0.1

• 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 6.4782 -0.04%

Offshore 6.6498 -2.50%

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 Kim Coghill)