China's yuan slipped on Wednesday as weak credit demand knocked interbank rates lower and investors awaited a U.S. interest rate hike while worries about the property sector also weighed on sentiment.

The People's Bank of China set the midpoint rate at 6.7731 per dollar prior to market open, weaker than the previous fix 6.7483. In the spot market, the yuan opened at 6.7621 per dollar and was changing hands at 6.7661 at midday, 12 pips weaker from the previous late session close.

China's yuan was weakening towards the "6.77 level on concern over the property sector rout and flooding liquidity condition," said Ken Cheung, chief Asian FX strategist at Mizuho Bank. China's onshore overnight repurchase rate fell below 1% for first time since January 2021, pressured by ample interbank liquidity and subdued credit demand.

"Considering the pretty low real interest rates in China, perhaps China’s economy is falling in a liquidity trap and more fiscal policy and property market easing will be needed to support growth," Cheung added. He noted conventional monetary easing seemed to be ineffective in supporting growth at the moment. Investors await the Politburo meeting later this week, at which top decision-makers gather to discuss their next policy moves. Separately, profits at China's industrial firms returned to growth in June, up 0.8% from a year earlier, rebounding from a 6.5% decline in May, bolstered by the resumption of activity in major manufacturing hubs.

However, domestic COVID-19 uncertainties continued to weigh on China's economic recovery and its currency. The major city of Wuhan temporarily shut some businesses and public transport in a district with almost a million people on Wednesday. Market participants are also eyeing a potential meeting between Chinese and U.S. leaders.

Joe Biden and Xi Jinping are expected to talk on Thursday, a source said, amid tensions over Taiwan and Russia's invasion of Ukraine. The dollar rose against a basket of major currencies overnight as recession fears grew and investors awaited the Federal Reserve's policy statement with a 75 basis points rate hike is widely expected later on Wednesday. The global dollar index fell to 106.972 from the previous close of 107.189.

The offshore yuan was trading at 6.7672 per dollar. The yuan market at 4:54AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.7731 6.7483 -0.37% Spot yuan 6.7661 6.7649 -0.02% Divergence from -0.10% midpoint* Spot change YTD -6.08% Spot change since 2005 22.32% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 106.972 107.189 -0.2 *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 6.7672 -0.02% * Offshore 6.7204 0.78% 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 Jason Xue and Brenda Goh; Editing by Sam Holmes)