SHANGHAI/SINGAPORE, Sept 11 (Reuters) - China's central bank yanked the yuan off a 16-year low against the dollar on Monday by setting the daily midpoint guidance with its strongest bias on record, signalling increasing discomfort with the currency's recent weakness.
Stronger-than-expected August lending data gave the currency another boost, following a string of indicators showing the economic downturn may be stabilising.
New bank lending in China beat expectations by nearly quadrupling in August from July's level, as the central bank sought to shore up economic growth amid soft demand at home and abroad.
The onshore yuan ended the domestic trading session at a week-high of 7.2906 per dollar, up 544 pips from the previous late night close.
The spot rate hit a low of 7.3510 per dollar last Friday - a level last seen during the global financial crisis - marking a 6.1% decline since the start of the year.
The offshore yuan followed the trend and rebounded to 7.3080 per dollar around 0830 GMT, compared with the previous close of 7.3648.
Prior to the market's opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.2148 per dollar, 3 pips firmer than the previous fix of 7.2150.
That was 1,289 pips firmer than the Reuters' estimate of 7.3437, and was the largest deviation from market projections on record. For the past few months, the PBOC has set firmer-than-expected daily guidance rates to stem the yuan's decline.
The PBOC's much strengthened fixing also limited downside for the yuan. The lower edge of the daily trading band is capped at 7.3591.
"The wider fixing gap implies that the authorities are again showing determination to prevent the yuan from further weakening, with a policy gesture to guide market expectations towards less depreciation," Bruce Pang, chief economist at Jones Lang Lasalle, said.
"But the yuan could see more challenges ahead in the near-term, given the uncertainties of the Federal Reserve's pace (of monetary tightening), the Sino-U.S. policy split, and the souring global risk appetite."
Offshore yuan liquidity remained tight with Hong Kong's overnight yuan borrowing costs staying elevated, which made it costly to short the Chinese currency.
The overnight CNH Hong Kong Interbank Offered Rate benchmark (CNH HIBOR) stood at 3.93197% on Monday, the highest since Aug. 22, and was 67 basis points higher than the fixing on Friday.
Sources told Reuters last week that China's major state-owned banks were seen mopping up yuan liquidity in the offshore foreign exchange market.
"There will be more focus on whether the PBOC ramps up its defence as spot yuan is on the cusp of making fresh cycle highs, or if it raises the USD/CNY fixing instead and cuts the medium-term lending facility (MLF) rate on Friday again," analysts at HSBC said in a note.
Some 400 billion yuan ($54.61 billion) worth of medium-term policy loans are due to mature on Friday, when the PBOC is widely expected to roll over.
Separately, China's foreign exchange self-regulatory body said on Monday it would resolutely fend off risks of the yuan overshooting and pledged to take actions when needed to correct one-sided and pro-cyclical activities, according to an online statement published by the PBOC. (Reporting by Shanghai Newsroom; Editing by Simon Cameron-Moore, Sam Holmes and Andrew Heavens)
