Yuan stabilizes after new currency requirements, corp clients said to hedge

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    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)
  

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