China's yuan gains, stocks grind after attempt to soothe markets

By Winni Zhou and John Ruwitch

SHANGHAI (Reuters) - China's yuan rose sharply against the dollar on Wednesday, a day after the central bank assured markets the it would keep the currency stable amid heightened worries about trade frictions, although stocks remained under pressure.

Chinese currency and equity markets have been on tenterhooks ahead of July 6, when U.S. tariffs on $34 billion worth of Chinese goods are set to kick in. Beijing has said it would retaliate with tariffs on U.S. products.

The yuan had its worst month on record in June, losing about 3.3 percent of its value against the greenback, and the slide continued on Monday, the first trading day of July.

On Tuesday, though, the yuan rebounded after People's Bank of China Governor Yi Gang's remarks and continued to ride the updraft on Wednesday, putting it on track for its first two-day winning streak since the middle of June.

At 0341 GMT, it was trading at 6.6305 yuan per dollar, 0.2 percent stronger than the late night close on Tuesday.

"Thankfully for regional risk, the PBOC engaged the yuan airbrake yesterday afternoon and at least for the time being, with the help of Chinese state-owned banks who were seen selling dollars to prop up the Chinese currency, is restoring a sense of calm in regional markets," OANDA wrote in a note.

A trader at a Chinese bank said the PBOC's signal was clear, but the market would closely watch and react to developments ahead of July 6.

"In the short term, the yuan will continue consolidating at the current level, while sharp, one-way falling might have come to an end," the trader said.

Key Chinese equity indexes were less enthusiastic, flip-flopping for part of the morning around Tuesday's closing prices before ending the session in negative territory.

The benchmark CSI300 Index was down 0.85 percent by the lunch break, and the Shanghai Composite Index was off 0.68 percent.

At 0345 GMT, Hong Kong's Hang Seng Index was down more than 1 percent, while an index that tracks mainland companies had fallen about 1.5 percent.

(Editing by Sam Holmes)