SHANGHAI/BEIJING China set a stronger-than-expected trading band for its currency on Tuesday and state banks sold dollars against the yuan, market sources said, in the strongest sign yet the authorities are growing increasingly uncomfortable with its quickening slide.

The yuan has fallen about 4% on the dollar in two months as flagging consumer confidence and a soggy property market have sapped momentum from the post-pandemic recovery. It bounced about 0.4% on Tuesday, its best gain in almost two weeks.

State banks were selling dollars to buy yuan in the offshore spot market, according to four people familiar with the trades, and it appeared as the currency neared the psychologically important 7.25 per dollar level, two of the people said.

The banks were also active late on Monday, according to two more traders, when they bid up the yuan sharply into the onshore close, which influences the central bank's official yuan midpoint fixing the next day.

On Tuesday, the People's Bank of China (PBOC) set the middle of the band even firmer than expected, deviating from forecasting models by the most since May.

Analysts said that together the moves showed official unease at the yuan's downward momentum and that they could slow but perhaps not halt a decline, given the dour economic outlook.

"They are sending more signals now they're uncomfortable ... they would like to slow the yuan weakness," said Moh Siong Sim, a currency strategist at Bank of Singapore. "The speed has been too fast for their liking."

The yuan ended Monday at a seven-month low of 7.2425 per dollar and was at 7.2105 in Tuesday afternoon trade.

"The 7.25 level remains a key threshold," said one of the market sources, adding that a breach of the level could quickly send the yuan to lows last seen in 2022.

All of the sources spoke on condition of anonymity as they are not authorised to speak about trades publicly. UBS said in a note that its trading desk saw heavy interest among banks in pre-market trades to procure dollars via buy-sell currency swaps, and said there might have been efforts by the authorities to neutralise the impact from their spot intervention.

State banks usually act on behalf of the country's central bank in the foreign exchange market, but they could also be trading for themselves or their clients.

BACK FOOT

The push back comes as investors sour on China, with data showing China's vaunted rebound faltering. Still, the stuttering recovery has stoked expectations of stimulus to help offset growth worries.

Stocks in Hong Kong and the Australian dollar bounced sharply on Tuesday in concert with the yuan.

Analysts said moves to halt the yuan's slide were not yet as firm as last year, when regulators rolled out measures to encourage capital inflows, but might be enough to slow selling.

In November, the currency hit a 14-year trough of 7.3280 per dollar, while the offshore yuan touched a record low of 7.3746.

"The implications are that markets are going to be more cautious about pushing the dollar/offshore yuan much, much higher from here," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

That can at least put the brakes on if China's economy - or the prospect of further interest rate cuts - keeps the yuan from slipping further downhill.

"We've got to be thinking about the likelihood of further easing ahead," said Rob Carnell, ING's regional head of research, Asia-Pacific.

"What we've seen is just the first iteration of the rate cuts that we're going to get. We're going to get plenty more of those over the next couple of months," said Carnell.

"That's got to keep yuan on the back foot."

(Reporting by Shanghai and Beijing Newsroom, Ankur Banerjee, Tom Westbrook and Rae Wee in Singapore; Editing by Vidya Ranganathan, Kim Coghill and Jacqueline Wong)