* Yuan pulls back after hitting three-year high vs dollar<\/p>\n
* Set for strongest monthly gain since August<\/p>\n
* Former forex official joins chorus cautioning on yuan gains<\/p>\n
* China\u2019s economic recovery drives inflows (Adds detail, background, updates market levels)<\/p>\n
SHANGHAI, May 31 (Reuters) – The yuan hit a three-year high against the dollar on Monday before falling back following a chorus of warnings from Chinese officials against speculative bets on the currency.<\/p>\n
A former senior official at the foreign exchange regulator joined a slew of current and former officials on Monday cautioning against one way bets on the yuan, which has seen a two-month long rally against the dollar. In a commentary in the official China Securities Journal, Guan Tao warned against herd behaviour that could harm market order and weigh on China\u2019s exporters.<\/p>\n
Guan\u2019s comments echoed those of a former central bank official, who said on the weekend that the yuan\u2019s rise is not sustainable, and followed a warning by the central bank-backed Financial News of factors that could lead it to weaken against the dollar. Regulators said last week they would crack down on forex market manipulation, while leaving currency policy unchanged.<\/p>\n
The latest comments come as a robust economic recovery and capital inflows are putting the yuan on track to log its biggest monthly gain against the dollar since August.<\/p>\n
The People\u2019s Bank of China (PBOC) has also given implicit approval for a strong yuan through its midpoint – spot yuan can trade 2% either side of the daily fixing. On Monday, it lifted the midpoint to 6.3682 per dollar, the strongest since May 17, 2018.<\/p>\n
The firmer fixing also pushed the trade-weighted yuan basket index up to 98.22, its highest since March 29, 2016. Market players have widely viewed the 98 mark as the basket\u2019s ceiling, as levels above that are seen to pose a disadvantage for the yuan versus its trading partners.<\/p>\n
Spot yuan rose to a top of 6.3607 per dollar on Monday, its strongest since May 18, 2018, but later changed direction to trade slightly weaker at 6.3689.<\/p>\n
Offshore yuan strengthened to 6.3555 per dollar, its firmest since May 23, 2018 before weakening to 6.3656.<\/p>\n
\u201cFor banks\u2019 proprietary trade, traders are paying attention to the official comments and attitude while also monitoring state bank actions,\u201d said a chief trader at a foreign bank in Shanghai. China\u2019s state banks have been known to step into the market to keep the yuan from breaching key levels.<\/p>\n
He said yuan strength could face resistance as overseas corporates buy dollars to make upcoming dividend payments.<\/p>\n
\u201cSome had purchased dollars mid-month, but these flows are not over yet. Some companies are monitoring the market and waiting for better prices.\u201d<\/p>\n
But few expect a significant shift in structural factors that have driven the yuan\u2019s rise, including strong inflows as the economy continues to recover. China\u2019s factory activity continued to expand in May, despite surging raw materials prices weighing on small- and export-oriented firms.<\/p>\n
Dave Wang, a portfolio manager at Nuvest Capital in Singapore, said a reappraisal of China\u2019s financial sector and a brightening of the outlook on rates and bad debts had catalysed fresh buying.<\/p>\n
Last week, heightened foreign interest led to record inflows into Chinese A-shares through the Stock Connect scheme linking the mainland with Hong Kong.<\/p>\n
China\u2019s major stock indexes slipped on Monday, but remained on track for their best monthly gain in about six months. Flows into Chinese bonds have also been resilient.<\/p>\n
Iris Pang, chief China economist at ING in Hong Kong, said in a note that yuan uncertainty presents a headache for companies, but that warnings from the PBOC about volatility should not be ignored.<\/p>\n
\u201cWe believe that the PBOC is experimenting how much volatility the market can endure, and how behaviour of market participants can move the yuan. The PBOC could use window guidance to (financial institutions) not to speculate on yuan direction,\u201d Pang told Reuters.<\/p>\n