China's yuan bounced against a buoyant dollar on Friday, underpinned by state bank support, further strong fixing guidance by the central bank and signs of liquidity tightness in the offshore yuan market. Major state-owned banks were seen swapping yuan for U.S. dollars in onshore forwards market and selling those dollars in the spot market to stem the yuan's declines, three sources with knowledge of the matter said.

Such dollar selling effectively capped the yuan from sinking too far and too fast. The onshore yuan opened at 7.3018 per dollar, rebounded to a high of 7.2950 before changing hands at 7.3000 by midday, 66 pips firmer than the previous late session close.

Still, it has lost around 0.6% so far this month and depreciated 5.5% in the year to date. Prior to the market 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 7.1729 per dollar, 1 pip firmer than the previous fix of 7.173. The central bank continued its months-long trend of setting the daily official guidance fix much firmer than market projections, which analysts and traders interpret as an official attempt to rein in weakness.

Friday's midpoint was 1,280 pips stronger than Reuters estimate of 7.3009. The PBOC has set the midpoint around 7.1730 per dollar for five straight trading sessions to cap the yuan's downside limit at around 7.3160. "USD/CNH is consolidating around 7.30, anchored by a remarkably steady string of onshore yuan fixings around 7.17 this week," Chang Wei Liang, FX and credit strategist at DBS Bank, said in a note. "Offshore RMB liquidity conditions remain tight ... We expect significant volatility in the offshore yuan rates market heading into China's Oct holidays, given a clear policy bias to ward off yuan shorts and stabilize the exchange rate," Chang added, referring to the week-long holidays starting on Sept. 29. Signs of tightness include the elevated Hong Kong's offshore yuan CNH HIBOR, a gauge that measures the offshore yuan liquidity conditions. "Offshore yuan conditions has become tight, yuan short sellers are expected to be more restrained in this case," said a trader at a foreign bank. Higher yuan borrowing costs erode the carry advantage of the Chinese currency and make it more expensive to short the yuan, currency traders said. By midday, the offshore yuan was trading at 7.2988 per dollar, compared with the previous close of 7.3160.

The yuan market at 0319 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.1729 7.173 0.00% Spot yuan 7.3 7.3066 0.09% Divergence from 1.77% midpoint* Spot change YTD -5.48% Spot change since 2005 13.38% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 105.493 105.363 0.1 *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% from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.2988 0.02% * Offshore 7.1185 0.76% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Shanghai and Beijing Newsroom; Editing by Kim Coghill)