China's yuan turns up, bounces off one-year lows as big state banks seen selling dollars

SHANGHAI (Reuters) – China's yuan bounced back from one-year lows against the US dollar on Friday afternoon, after traders -US trade conflict.

The People's Bank of China lowered its midpoint yuan for the seventh straight trading day to 6.7671 per dollar on Friday, 605 pips or 0.9 percent weaker than the previous fix of 6.7066.

The latest tip of yuan weakness, catalysed by concerns over the brewing China-U.S. Chinese economy, has seen the yuan shed 7.6 percent of its value against the dollar since the end of the first quarter of this year.

Friday's fixing is the lowest since July 14, 2017, and is the largest single-day weakening in percentage terms since June 27, 2016.

The midpoint largely matched market forecasts, traders said, an indication that the authorities did not appear eager to hit the brakes on the yuan's fall.

Later, though, four traders said they had seen major state-owned banks selling dollars and propping up the yuan.

"Big banks were offering dollar liquidity onshore and offshore, instead of only selling onshore as what they used to do. In this case, it could have better effect, "said one of the traders.

Another trader said he saw state banks selling dollars onshore at around 6.81 per dollar. The dollar selling had the effect of the yuan to pull back from its downhill dash.

Traders and economists say they suspect big state-owned banks on the other hand.

Ken Cheung, Senior Asian FX Strategist at Mizuho Bank in Hong Kong, said investors were unsure of the future for the Chinese currency.

"Investors do not know how far the yuan could fall," he said.

"(The authorities) might want to keep economic growth stable, and the impact of a weaker dollar could be felt. "

Complicating matters, US President Donald Trump said in an interview on CNBC television that he was concerned that the Chinese currency was" dropping like a rock "and the strong US dollar"

The spot in the market, however, opening at 6.7950 per dollar on Friday before weakening 6.8 per dollar to a low of 6.8128 at one point .

It recouped all the losses in the afternoon. As of 0600 GMT, the onshore spot was trading at 6.7760, 36 pips firmer than the previous late close session.

The spot rate is currently being allowed to trade within a range of two countries.

Offshore the yuan was trading 0.33 percent softer than the onshore spot at 6.7983 per dollar.

Some traders said the dollar liquidity offered by the big state-owned banks in the morning halted the sharp decline in the yuan, causing it to reverse race.

Though many in the market do not think the authorities have drawn a firm line in the sand for the depreciating Chinese currency, some said they were not overly bearish for now.

mK. Tang, senior China economist at Goldman Sachs, said he was not too worried about the depreciation in the yuan as policymakers had better control over the outflow channels.

"The depreciation we saw, the reason that happened, is because policymakers have been comfortable with that. But if some day policymakers become uncomfortable because they think it's too excessive then I think it's quite likely that the authorities would have ways to stabilize the currency, "Tang said.

"So fundamentally speaking, we do think in the world"