China's yuan dips after band widening, seen on tight leash for now

SHANGHAI/HONG KONG (Reuters) - China's yuan eased against the dollar on Monday after the central bank doubled the currency's daily trading band as part of its commitment to let markets play a greater role in the economy.

Yet the currency moved in a relatively narrow range reflecting market view that the People's Bank of China will seek to limit currency swings at a time when markets fret over China's cooling growth and the quality of corporate debt.

"The PBOC, with the help of major state-owned banks, will for certain tighten the grip on yuan's value in coming days and weeks to prevent what it sees excessive volatility," said a dealer at a European bank in Shanghai.

In the longer run, however, the central bank is expected to allow the currency to move in a broader range, reflecting its confidence that it can keep speculators at bay and that the economy was mature enough to handle greater uncertainty about the exchange rate.

"Over time, the widening will pave the way for the PBOC to gradually lessen intervention in daily trading and will help China's reforms to make the yuan fully convertible eventually."

On Saturday, the People's Bank of China doubled the yuan's daily trading range, so that it can now rise or fall 2 percent around the daily midpoint rate. The currency opened at 6.15 to the dollar, just 0.29 percent to the weaker side of the official mid-point rate. It briefly fell to an intraday low of 6.1642, 0.2 percent weaker than Friday's close.

Since the start of this year the yuan has lost 1.8 percent against the dollar, largely as a result of central bank's efforts, reversing much of last year's near 3 percent rise as Beijing sought to change the perception the yuan was a safe one-one appreciation bet.

Beijing's efforts to clamp down on such trades combined with concerns over China's economic health, are expected to keep the yuan on the back foot in coming weeks.

Earlier this month, a Chinese company became the first to default on a corporate bond, and worries of slowing economic growth were highlighted by a dramatic 18 percent fall in exports in February and sluggish manufacturing.

"The weak economic data implies that it is unlikely to see CNY appreciation and capital inflows after the band widening, indeed the near-term bias could be the opposite," said Zhu Haibin, an analyst at JP Morgan in Hong Kong.

In the longer-run, the yuan could still find support in China's sizeable current account surplus and its massive $3.8 trillion currency reserve war chest, but markets are less confident about the currency's near term outlook.

Dealers said the central bank's midpoint level fixed 0.04 percent firmer than Friday's level and Monday's opening trades suggested it was Beijing's intention to keep markets guessing about where yuan would be heading.

"These rates are the first signs that the band widening may not point to any certain direction of yuan depreciation or appreciation," said a dealer at a Chinese commercial bank in Shanghai.

Reflecting that heightened uncertainty, one-month implied dollar/yuan volatilities traded in the offshore market, perhaps the clearest indicator of how volatile the Chinese currency is expected to be over the next month, hit a record before easing slightly.

(Additional reporting by Pete Sweeney; Writing by Saikat Chatterjee; Editing by Tomasz Janowski)