SHANGHAI: China's yuan weakened on Monday even though the central bank set a stronger midpoint as the dollar index slid in overnight trade after better-than-expected U.S. jobs data increased investor risk appetite. The People's Bank of China (PBOC) set the midpoint at 6.3353 in the morning. Spot prices opened at 6.3680 per dollar, slightly stronger than Friday's close, continuing a trend of trading closer to the midpoint that began in late July. However, volatility was minimal and spot yuan closed at 6.3742 per dollar. A trader at a joint-stock bank in Shanghai said transaction volumes were light. The spot price bounced off the limit of its official 1 percent trading band on July 20, in reaction to what traders considered an excessively strong midpoint setting. The yuan has been allowed to move by 1 percent in either direction from the midpoint setting since April. Since July 20, the central bank has been more careful with its midpoint settings, traders said. On Monday, the official China Securities Journal published an article arguing that the government should allow the yuan to depreciate to an "appropriate" degree. "Although expectations of yuan deprecation could spark some short-term capital outflows, they will be beneficial by enhancing exports and helping to ease inflation worries," the newspaper said. The yuan has dropped 1.23 percent against the dollar so far this year, and traders say they believe it may have room to fall nearly 1 percent more over the remainder of the year. MANAGING DEPRECIATION The PBOC is striving to balance the benefits a weaker yuan provides exporters -- who are particularly concerned about the effect the yuan's strength against the euro will have on their order book -- against the risk of destabilising capital outflows. Foreign direct investment into China has slowed, and China's capital and financial account swung into a capital account deficit in the second quarter as domestic firms and residents increased holdings of foreign currencies amid the global turbulence. Global instability, combined with the increasing likelihood the yuan could depreciate a further 1 percent this year, has had an impact on customer sentiment. Data shows that Chinese corporates' preference for dollars has increased this year, and traders said Chinese oil companies are particularly eager to hold dollars. Offshore yuan forward contract prices have been implying mild depreciation since mid-March, despite widespread predictions by economists that the yuan would appreciate by the end of the year. The one-year non-deliverable yuan forward contract traded at 6.4200 at the market close in Shanghai. The offshore yuan (CNH) spot rate, however, has begun to move away from onshore spot rates in August. CNH changed hands at 6.3885 to the dollar at the close.

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