China's yuan dips as stocks slump, loss capped by c.bank midpoint

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China's major stock indexes tumbled more than 8 percent on Monday morning, with traders saying disappointment over the lack of widely expected monetary policy easing measures over the weekend triggered a fresh sell-off.

The market had expected that the central bank would cut banks' requirement reserve ratios (RRR) to counter the economic slowdown.

"The yuan market was affected by the stock turmoil in early trade," said a trader at a Chinese commercial bank in Shanghai.

"However, the central bank's relatively strong guidance rate helped stabilize the exchange rate to some extent."

The People's Bank of China set the midpoint rate CNY=SAEC at 6.3862 per dollar prior to market open, slightly stronger than the previous fix of 6.3864.

The spot market CNY=CFXS opened at 6.3897 per dollar and was changing hands at 6.3978 at midday, off an intraday low of 6.3994 but was still 0.14 percent weaker than the previous close.

Offshore yuan CNH=D3 was trading 1.04 percent down from the onshore spot at 6.4648 per dollar.

The basis spread between offshore yuan and the onshore spot rate expanded to its widest level in nearly four years.

"If the CNH liquidity in the offshore market continues to tighten, we could see further capital outflows from mainland China," said Zhou Hao, a senior economist at Commerzbank AG, in Singapore.

"Maybe at the end of the day, China will have only two options: one is to put more control on the capital account; second is to let the currency go."

Non-deliverable currency contracts (NDFs) CNY1YNDFOR= in the offshore market for the Chinese currency was being quoted at 6.65 per dollar in early trade, a nearly 4 percent discount in 12 months to the onshore market rate.

Spreads between one-year and one-month NDFs widened considerably indicating more weakness in the Chinese currency over the medium term.

The yuan market at a glance:

ONSHORE:

Item Current Previous Change

PBOC midpoint 6.3862 6.3864 0.00%

CNY=SAEC

Spot yuan 6.3978 6.3887 -0.14%

CNY=CFXS

Divergence from 0.18%

midpoint*

Spot change ytd -3.03%

Spot change since 2005 29.36%

revaluation

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.4648 -1.04%

CNH= *

Offshore 6.6495 -3.96%

non-deliverable

forwards

CNY1YNDFOR= **

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint.

"The spot market CNY=CFXS opened at 6.3897 per dollar and was changing hands at 6.3978 at midday, off an intraday low of 6.3994 but was still 0.14 percent weaker than the previous close.Offshore yuan CNH=D3 was trading 1.04 percent down from the onshore spot at 6.4648 per dollar"CNY=SAEC.

GRAPHICS:

The yuan in trade-weighted terms link.reuters.com/sed74t

The spot market versus the trading band reut.rs/1MhsqOi

(Reporting by the Shanghai Newsroom and Saikat Chatterjee in Hong Kong; Editing by Jacqueline Wong)