UPDATE 1-China state banks buy dollars to ease sharp yuan rally, traders say

(Adds trader comments, details and background)

SHANGHAI/BEIJING, Dec 31 (Reuters) - China’s major state-owned banks were seen buying U.S. dollars at the rate of about 6.52 yuan on Thursday, traders said, in a move viewed as an effort to keep the local currency from rising too fast and breaching a key level.

The onshore spot market opened at 6.5204 per dollar and surged to a high of 6.5148 at one point in morning trade, its loftiest since June 22, 2018.

The state bank action quickly dragged the yuan to the weaker side of 6.52 per dollar, four traders told Reuters.

“Two state banks bid at that level today,” said one of the traders.

For the year, the yuan has appreciated nearly 7% and is set to book its first annual gain in three.

Another trader said big banks started purchasing the greenback whenever the spot price rose past 6.52, adding the move could be an attempt by authorities to control the pace of yuan appreciation through state banks.

Traders added that 6.52 is widely seen as the ceiling for the yuan for now. A breach of that level could push the yuan over the key rate of 6.5, considered by markets as a new red line for authorities.

A third trader said a breach of 6.52 could trigger execution of some currency derivatives including options, which would lead the yuan to strengthen past 6.5 per dollar level.

Sources told Reuters earlier this month that Chinese policymakers were comfortable with the yuan’s rise to 2 1/2-year highs as a rebound in the world’s second-biggest economy accelerates.

But the central bank could take action if rapid rises in the closely managed currency hurt the country’s exports.

A weaker U.S. dollar, the widening yield gap between China and the United States and China’s effective coronavirus containment have underpinned the yuan, prompting it to rise about 10% against the dollar since late May.

State-run banks are widely believed to trade on behalf of the central bank in the country’s foreign exchange market, but they could also trade on their own behalf.