* Yuan pauses after strengthening around 1 pct since Tuesday
* Onshore yuan set for the best week since late July
* Offshore overnight borrowing rates spike
* Analysts expect depreciation to continue over 2017
(Recasts, adds detail, quotes)
By Winni Zhou and John Ruwitch
SHANGHAI, Jan 6 China's yuan held onto its gains
after a two-day rally on Friday as borrowing rates for its
offshore component soared and the central bank set a stronger
guidance rate for the currency, signaling no respite in official
efforts to contain speculation.
Both the onshore and the offshore yuan
have been rallying this week, driven predominantly by a blow-up
in yuan borrowing costs offshore and tighter liquidity.
The People's Bank of China (PBOC) set the official midpoint
for the yuan, which is allowed to move in a tight
band around that guidance rate, at 6.8668 per dollar prior to
the market opening, 639 pips or 0.9 percent, firmer than the
That made it the largest upward move since the yuan was
revalued and taken off a fixed dollar peg in July 2005.
By 0415 GMT, the currency was trading at 6.9103 to the
dollar, down 0.4 percent from late Thursday but about 1 percent
up from Tuesday's close, the first trading day of the year. The
currency was on track to log its best week since July 2016.
Chinese authorities are keen to deter speculation in the
currency and analysts and traders suspect policymakers have
sought to prevent it from weakening to the 7-per-dollar level
ahead of U.S. President-elect Donald Trump's inauguration on
In the short run they may have some success but pressure
will remain on the yuan to depreciate over time, they said.
"I don't think the volatility in the yuan so far this week
will reverse the trend of depreciation. But the yuan is at least
unlikely to have another rapid fall ahead of the Lunar New
Year," said a Shanghai-based trader at a foreign bank.
BATTLING YUAN BEARS
Interbank rates for the offshore yuan have been
surging this week, suggesting China is keen to squeeze
speculators by making it prohibitively expensive to short-sell
the yuan. Yuan liquidity conditions in Hong Kong, the main
offshore yuan hub, have been tightening.
Overnight yuan interbank rates in Hong Kong were fixed at
61.333 percent on Friday, up sharply from 38.335 percent on
Thursday, while yuan deposit rates implied by the offshore
forward market ballooned to 112 percent before
Some of the pressure on yuan funding has also been on
account of a drying up of yuan deposits in Hong Kong as
investors steadily lost faith in a currency which fell 6.6
percent in 2016, its biggest annual fall since 1994.
China's currency reserves data due this week is also
expected to show reserves are close to falling below the
critical $3 trillion figure, which would partly explain the
authorities' desire to stem capital outflows and bets that the
currency will keep depreciating.
The offshore yuan, or CNH, has risen about 2.5 percent since
Tuesday, with its gains over Wednesday and Thursday being the
biggest two-day gains since its introduction in 2010.
Its rally rippled across major currency markets, causing the
U.S. dollar to give up some of its recent gains against the euro
Still, few seem to be altering their expectations for a
weaker yuan in the coming months.
"We believe the surge in the CNH is not sustainable," Gao
Qi, FX strategist at Scotiabank in Singapore, wrote in a note on
Gao expects the yuan to depreciate about 5 percent against
the dollar this year amid market worries over potential
political and trade conflicts between the United States and
China after Trump takes office.
Underscoring policymakers' concerns about the falling yuan,
China's central bank will not tolerate sustained depreciation of
the yuan, the China Securities Journal said on Friday.
The Chinese currency was not obviously over-valued, and the
appreciation of the U.S. dollar has its upper limit, it said in
(Editing by Jacqueline Wong)