The yuan strengthened but stopped short of breaching its recent post-revaluation high against the dollar on Thursday as traders worried the central bank might intervene to pull it back if it rises too far, too fast.
The yuan rose as far as 6.7808 against the dollar on Thursday, a whisker from Wednesday's peak of 6.7801, its highest since its July 2005 revaluation.
Traders in Shanghai said the yuan ran into selling as it neared 6.7800, which it also failed to breach on Wednesday.
They said the central bank was not seen intervening in the market on Thursday, but worried that could change if the yuan rises to a new peak.
The market is careful about buying more yuan, lest it continue to appreciate sharply, said a trader at a major Chinese bank.
He said traders were satisfied with the near 50-pip gain in the yuan on Thursday from the reference rate and were reluctant to nudge it any higher.
The yuan ended the day at 6.7810 to the dollar, up from Thursday's reference rate of 6.7858 but little changed from Wednesday's close of 6.7814.
The reference rate, from which the yuan can rise or fall by 0.5 percent, is set by the central bank every day before the start of trade. Thursday's rate was fixed at its highest since the July 2005 revaluation.
Traders' apprehension about pushing the yuan up too far showed they took seriously the Chinese central bank's regular comments about not wanting to see a big rise in the currency.
China is worried a stronger yuan would weigh down growth by dragging on exports, the economy's lifeblood.
In the coming months, however, traders seemed confident the yuan would rise, day-to-day volatility aside.
They said the central bank's depegging of the yuan from the dollar last month was the clearest sign yet that Chinese authorities were ready for a stronger currency.
Some traders added that they were ready to look past soft patches in economic data, as they believed policies from China's central bank and government counted more in projecting the yuan's future value.
Indeed, the market brushed aside data on Thursday that showed slowing growth in China's manufacturing sector.
Overall, the market is moving in only one direction. The only differences are disagreements over the extent and speed of the yuan's appreciation, said a trader at a Chinese bank.
The yuan's value has been a lightning rod in China's ties with the United States, where several prominent lawmakers have accused China of holding down its currency by as much as 40 percent to gain an unfair edge in trade.
China has always denied those allegations, but vowed on June 19 to let the yuan move more freely by ditching its controversial peg to the dollar.
The yuan has since risen 0.67 percent, huge by historical standards after spending most of its life chained closely to the dollar, rarely moving more than 0.2 percent on any given day.
Everyone is following the yuan's rise so everyone is long the yuan, said a trader at a major U.S. bank.
Data on Thursday showed China's official purchasing managers' index (PMI) fell to a four-month low of 52.1 in June, from May's 53.9. It was the first piece of Chinese economic data to be published for June.
Although the PMI showed China's manufacturing grew for a 16th straight month, some economists said there was no doubt the Chinese economy was slowing as authorities tightened monetary policy.
Yuan investors outside China, in contrast to the bullish tone in the spot yuan market, seemed more sanguine on Thursday.
A rising yuan in Shanghai has in the past sparked a sell-off in dollar/yuan non-deliverable forwards (NDFs) as investors eye a stronger yuan in coming months.
But on Thursday, the more actively traded NDF contracts were up marginally, as some investors took profits in their short dollar/yuan investments after Wednesday's late drop.
Three-month NDFs edged up to 6.7800, implying expectations for the yuan to rise 0.09 percent in three months, as calculated from Thursday's reference rate. That is down from Wednesday's implied appreciation of 0.19 percent.
One-year NDFs inched up to 6.6680, from Wednesday's 6.6650. That dragged the implied appreciation in a year down to 1.77 percent, from Wednesday's 1.90 percent.
(Additional reporting by Karen Yeung; Editing by Edmund Klamann)