Yuan trades lower than c.bank rate on dlr shortage

* Capital controls cause dollar shortfall despite FX reserves

* Yuan appreciation expectations spark dollar settlement

* Yuan seen trading between 6.8250 and 6.8350 in near term

* Other Chinese markets bubble despite super stable yuan

By Lu Jianxin and Jacqueline Wong

SHANGHAI, Nov 24 - The yuan edged up against the dollar on Tuesday after the Chinese central bank set its daily reference rate slightly higher, but the Chinese currency traded below the central bank's rate due to a dollar shortfall on the domestic market, traders said.

While China is now seeing a new wave of capital inflows from its recovering external trade, foreign direct investment and from speculative hot money, the Chinese market is still experiencing a dollar shortage because of its capital controls, dealers said.

"A globally weak dollar and expectations of an eventual appreciation of the yuan have made everybody unwilling to retain dollars," said a dealer at a European bank in Shanghai.

"Less dollar supply than demand in the market has pushed the yuan to trade mostly below the central bank's mid-point over the past week in a contrast with expectations of yuan appreciation."

The yuan is not fully convertible under the capital account and the People's Bank of China buys the bulk of foreign exchange flowing into the country with the aim of keeping the yuan stable against the dollar.

Under the capital controls, exporters must settle most of their dollar income with designated state-owned banks, who in turn settle most of their dollar positions with the central bank.

Although China has huge foreign exchange reserves of $2.27 trillion and the central bank can easily pump dollars into the market to balance demand and supply, it typically does not to avoid a flood of dollars in the system which could destabilise the yuan and fuel speculation.

Ironically, such controls only subject the market to more speculation about yuan revaluation expectations although the PBOC keeps a grip on the yuan's value via its reference rate, or mid-point, by which it can move only a limited amount in a day.

On Tuesday, the central bank fixed the yuan's mid-point <CNY=SAEC> slightly higher at 6.8276 versus the dollar, compared with Monday's level of 6.8279, reflecting but lagging overnight dollar weakness on global markets.

The reference rate guided spot yuan <CNY=CFXS> to trade at 6.8289 at midday, slightly higher than Monday's close of 6.8301, but the yuan's trading range of 6.8285 to 6.8297 was weaker than Tuesday's mid-point of 6.8276.

Dealers said they expected the yuan to trade narrowly in a 100-pip range between 6.8250 and 6.8350 in coming weeks.

Despite the super stable yuan, capital inflows have helped push China's stock market <.SSEC> up 27 percent since early September and the country's sky-high urban property prices up 3.9 percent in October from a year earlier, prompting officials and economists to send stern warnings against possible asset bubbles. [ID:nPEK198345] [ID:nPEK268294] [ID:nPEK279947]

Offshore, benchmark one-year dollar/yuan non-deliverable forwards <CNY1YNDFOR=> rose slightly to 6.6250 bid at midday on Tuesday compared with Monday's close of 6.6200.

Twelve-month yuan appreciation implied by NDFs fell slightly to 3.06 percent measured from the Chinese central bank's daily mid-point, compared with 3.14 percent implied at Monday's close. ((jianxin.lu@thomsonreuters.com; +86 21 6104 1792; Reuters Messaging: jianxin.lu.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))