* Market, PBOC still quoting spot yuan at different levels
* Forwards imply market wants spot yuan at around 6.2170/dlr
* That compares to current spot rate of 6.2301
* Speculation that PBOC is waiting for govt decision on yuan
By Lu Jianxin and Gabriel Wildau
SHANGHAI, Dec 7 (Reuters) – Corporate trade in yuan shifted
to the less tightly regulated forwards market on Friday, as the
central bank forced a weaker exchange rate against the dollar on
a market that was unwilling to deal at those levels.
The standoff left the yuan marooned at the top of the
official daily trading range for a 12th straight day, with very
little trading going on.
Spot yuan opened at its limit-up level of 6.2301 per dollar
and mostly stayed there through until midday, leaving it
slightly weaker than Thursday’s close of 6.2282.
The People’s Bank of China (PBOC) ensured its currency fell
by setting the yuan’s daily midpoint at 6.2930 versus
the dollar, the yuan’s weakest fix since Nov. 19.
The PBOC permits the exchange rate to rise or fall by no
more than 1 percent from the midpoint it sets each morning.
Under China’s tight control onshore currency market,
transactions on behalf of clients need to be backed by documents
proving trade or other approved economic activity in order to
curb speculation.
“Firms now try to sell their surplus dollars in short-term
forwards market, causing spot trading to be all but completely
deadlocked,” said a trader at a Chinese commercial bank in
Shanghai.
“While the market and the PBOC continue to quote the yuan at
different levels, the gap between their quotes is actually not
that big,” the trader said.
“The central bank also has enough resources to iron out the
balance of dollar supply and demand, so there is a big question
as to why it refuses to take a lead to break the deadlock.”
One-day yuan/dollar forwards traded at 6.2170
by midday. That suggests the spot market prefers to buy and sell
yuan only about 131 pips firmer than the official spot rate,
though overnight interest rates also play a role in forward
pricing.
China’s spot yuan deals are settled two days later, known as
T+2, so overnight forwards are settled three days later.
While trading volume in forwards is not available, spot
trade volume fell to only $137 million in the spot market in the
morning session, even less than the meagre $193 million traded
on Thursday morning. The market’s average full-day volume was
$13.9 billion in the first nine months of this year.
Traders expect low trading volumes in the spot market to
prevail until the end of this year or early 2013, with the PBOC
leaving it to the market to whittle down an overhang of dollars.
The overhang stems partly from long dollar positions built
up in the first half of the year, when the yuan was weakening.
Traders say the market is hoping that the central bank gives
way by either adjusting the daily trading range to let the yuan
strengthen, or by buying large amounts of dollars.
But so far, the PBOC has only appeared to buy when the
market’s illiquidity became pronounced, with one case being on
Wednesday this week and another on Friday last week.
The deadlock has triggered speculation on why the PBOC has
not been more aggressive.
Some traders suspect that the PBOC may be worried that it
will lose control of China’s exchange rate if it makes
concessions to the market by setting its midpoint sharply
stronger. That could fuel even stronger bullish sentiment
towards the yuan.
Others speculate say that the PBOC may be awaiting decrees
from senior authorities for a new yuan strategy.
China’s top economic leaders typically hold their annual
economic work conference at the end of each year to map out
principles for economic policy in the year to come. This year’s
meeting is expected to be held around mid-December, traders say.
Since last year’s meeting, Chinese leaders have stated that
the yuan is largely at fair value, and the PBOC should reduce or
even halt purchases of dollars aimed at curbing the yuan’s
strength. Such interventions were common for many years until
late 2011.
Authorities appear to have been caught off guard by a sudden
surge of dollar supply in the market since late July, which
fuelled a surprising yuan rally as the dollar fell against other
currencies, traders said.
“The PBOC is likely to obtain instructions on how to handle
the deadlock straight after the Central Economic Work
Conference, and a breakthrough is likely by late this year or
early 2013,” said a trader at a major European bank in Shanghai.
The yuan now stands 1.0 percent up versus the dollar for the
year so far, having rallied 2.7 percent from its low for the
year in late July.
(Editing by Simon Cameron-Moore)
