China's yuan inches lower, set for losing month, as tariff damage starts to emerge

SHANGHAI, April 30 (Reuters) - China's yuan inched lower against the dollar on Wednesday and looked set to post a loss for the month, as early signs of damage on the broader economy from higher tariffs under U.S. President Donald Trump start to emerge.

China's manufacturing activity contracted in April, an official factory survey showed on Wednesday, keeping alive calls for further stimulus as Trump's broad April 2 "Liberation Day" tariffs snapped two months of recovery.

"We expect the yuan to weaken somewhat further because of President Trump's tariffs," said Tommy Wu, chief China economist at Commerzbank.

"Tariffs have reached the maximum levels and both the U.S. and China will try to de-escalate trade tensions at some point. However, trade talks may not happen any time soon, nor will they result in any material outcomes quickly."

Trump imposed 145% duties on Chinese goods, prompting Beijing to retaliate with 125% levies on U.S. imports and other counter-measures.

Wu expects the yuan to weaken to 7.5 per dollar by the end of June and sees the level as "the line in the sand" for the central bank.

As of 0248 GMT, the onshore yuan CNY=CFXS was 0.04% lower at 7.2745 per dollar. If it finishes the late night session at the midday level, it would have lost 0.24% for the month.

Its offshore counterpart CNH=D3 weakened about 0.06% to 7.2730 per dollar by 0248 GMT.

The onshore yuan jumped on Tuesday and at one point had wiped out all the losses since the April 2 tariff shock, as investors rushed to square their positions towards the month-end and ahead of the long holiday.

Mainland Chinese financial markets will be closed for the Labor Day holiday from Wednesday, and trading will resume on May 6.

"We maintain our view of gradual yuan depreciation due to the impact of tariffs, ongoing deflationary pressures, weak growth, and capital account pressures, which may act as a drag on other Asian currencies," analysts at Barclays said in a note.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.2014 per dollar, its strongest since April 7 and 656 pips firmer than a Reuters' estimate CNY=RTRS of 7.2670.

This month, the PBOC slightly eased its control on the currency, allowing official guidance to weaken past the key threshold of 7.2. However, the guidance came in stronger than market forecasts, which traders interpreted as an official attempt to keep the yuan steady while allowing some flexibility to counteract tariff shocks.

Underlining the external risks, however, the yuan's value against its major trading partners, as measured by the CFETS yuan basket index .CFSCNYI, has fallen about 5.19% so far this year to 96.20, according to Reuters calculations based on official data.

Against the dollar, the yuan traded up 0.35% year-to-date.

Analysts at BNP Paribas said in a note that the PBOC "would prefer to have the yuan weaken against the basket as an effective, less disruptive way to manage the impact of tariffs."

LEVELS AT 0248 GMT: