Illustration photo of U.S. Dollar and China Yuan notes
Illustration photo of U.S. Dollar and China Yuan notes. REUTERS/Thomas White/Illustration

China's yuan strengthened on Thursday and its stock market rallied after an uncertain start, buoyed an invitation from the Trump administration to Chinese officials to restart trade talks.

The benchmark Shanghai Composite index.SSEC ended 1.1 percent higher at 2,686.58 points after closing at its lowest level since January 2016 on Wednesday.

The blue-chip CSI300 index.CSI300 also ended 1.1 percent higher, with a sub-index tracking securities firms gaining 1.4 percent, real estate rising 0.8 percent and industrials ending up 1 percent.

"The trade war has been a hot topic in the market all year long. The lack of clarity has been a major influence on the A-share market and to have a good signal at this low point certainly has an effect," said Li Zheming, an analyst at Datong Securities in Dalian.

The CSI300 healthcare sub-index.CSI300HC, which had earlier fallen as much as 5 percent and weighed on the broader index, trimmed losses to end 1.8 percent lower.

Healthcare companies have significantly outperformed the broader market in the year to date, falling 5 percent compared to nearly 20 percent for the CSI300.

The yuan CNY=CFXS had opened at a near one-week high against the U.S. dollar, supported as well by a firmer official yuan midpoint setting by the central bank.

Market attention was focused on trade after the Trump administration invited Chinese officials to restart trade talks, the White House's top economic adviser said on Wednesday, as Washington prepares to escalate the U.S.-China trade war with tariffs on $200 billion worth of Chinese goods.

News of a fresh round of talks supported the yuan and pressured the dollar, though few market watchers were optimistic of a breakthrough after several earlier meetings made little headway.[FRX/]

"While we agree this should provide short-term relief, the road ahead can still be tricky," Tai Hui, chief market strategist for JP Morgan Asset Management, said in a morning note.

"China did provide concessions earlier in the year to buy more U.S. products and reduce the bilateral deficit as well as opening up markets to foreign companies. If this did not satisfy the US six months ago, China may not be able to offer much more than that, especially if this involves adjusting its Made in China 2025 policy."

But a trader at a Chinese bank said market sentiment had improved following the latest developments, particularly as the proposed meeting was set to be between higher-level officials, giving the market hope that the talks could yield a breakthrough.

Prior to the market opening on Thursday, the People's Bank of China (PBOC) set the midpoint of the currency's daily trading band CNY=PBOC at 6.8488 per dollar.

That was 58 pips firmer than the previous fix of 6.8546, and largely in line with market forecasts following a fall in the dollar overnight, traders said.

In the spot market, the onshore yuan CNY=CFXS opened at 6.8327 per dollar, its strongest level since Sept. 7, and was trading at 6.8484 per dollar at 0726 GMT.

"Admittedly, the RMB market will likely remain highly uncertain in the rest of this year, depending on how the China-U.S. trade war unfolds," Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong said in a note.

He said the yuan would be unlikely to fall below 7 per dollar "given (the) PBOC's clear stance to defend the RMB."

The offshore yuan CNH=D3, which is more freely traded, booked its best day in 2-1/2 weeks on Wednesday, with strong gains in the U.S. session after the trade talks news emerged.

On Thursday, it was 0.2 percent weaker than its U.S. close at 6.8512 per dollar as of 0720 GMT.