(Corrects 11th paragraph to attribute comments to former official of foreign exchange regulator, and not the regulator)
By Pete Sweeney and Lu Jianxin
SHANGHAI (Reuters) - China guided its yuan currency stronger for a second straight session on Monday, in a move that might calm concerns about how ready Beijing is to let the currency depreciate, but added to doubts over the ultimate policy intent.
Perceived mis-steps by China's authorities have stoked concerns in global markets that Beijing might lose its grip on economic policy, even as the country looks set to post its slowest growth in 25 years.
A 1.5 percent depreciation in the yuan since the start of 2016, following a 4.7 percent weakening in 2015, has raised alarm among some trade rivals that China was risking a "currency war" of competitive devaluations.
The yuan's steadier performance could help temper those fears, but it failed to stop investors selling Chinese shares.
The Shanghai Composite Index and the CSI300 index were both down more than 3 percent on Monday afternoon after a 10 percent plunge last week that triggered a global sell-off of riskier assets.
The People's Bank of China set the mid-point for the yuan at 6.5626 per dollar, firmer than Friday's fix and substantially stronger than the spot yuan's unofficial close of 6.5938. Analysts had been expecting around 6.5860 for the mid-point fix, a level from which the yuan is allowed to stray no more than 2 percent.
The PBOC also set a stronger daily guidance rate for the yuan on Friday, following a sequence of eight weaker fixes, culminating in the biggest one-day drop in five months last Thursday.
"Different signals about FX policy have wrong-footed market participants, and we are wary in believing that an immediate calmness will soon emerge," wrote Paul Mackel, head of emerging markets FX research at HSBC in a note.
"In this context, we expect yuan volatility to remain high, while depreciation pressures are likely to remain strong."
The spot yuan strengthened in the morning to 6.5835, while the offshore yuan also gained ground to 6.6740, narrowing the spread between the two to just under 1.4 percent. The spread, which stretched to more than 2 percent last week, was complicating Beijing's struggle to stop capital flowing out of the slowing Chinese economy.
"TALKING DOWN"
A former head of the international payments department of China's foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), urged investors not to be alarmed by foreign institutions "talking down" the yuan, saying the currency remained stable against most currencies, even though it was down against the dollar, the official Economic Daily reported on Monday.
Beijing launched the RMB index last month, which weights the yuan's exchange rate against a basket of trade-related currencies, a move that will eventually loosen the currency's link to the greenback.
Zhou Hao, Senior Emerging Markets Economist for Asia at Commerzbank AG, said the last two days' fixes did suggest that the central bank wanted to hold back the pace of yuan depreciation as the RMB index dropped to below 100.
"We still need some time to check the credibility of China's new currency basket," he added.
Chinese markets have had a tortuous start to the year, buffeted by the falling yuan, two days of stock exchange suspensions last week, and weak factory and service sector activity surveys.
All of which raised anxieties ahead of China trade data on Wednesday, which are expected to show further declines in exports and imports, underlining the parlous state of world trade flows.
Figures out over the weekend showed Chinese consumer inflation stuck at a subdued 1.6 percent in December, while producer prices were down a steep 5.9 percent on the year - a deflationary pulse that is being felt across the globe.
(Reporting by Pete Sweeney and Lu Jianxin; Writing by Wayne Cole and Will Waterman; Editing by Simon Cameron-Moore)
