SHANGHAI, April 26 (Reuters) - China's sliding yuan has been hitting the weak end of the band in so-called cash settlement transactions this week, making it challenging for banks and businesses on the mainland to transact, traders say.

Under unrelenting pressure from rising U.S. yields and outflows from China, the yuan is at five-month lows against the dollar and has been declining to near its 2% policy band limit each day.

WHY IT'S IMPORTANT

The yuan's decline to the weak end of the permissible band underscores the heavy demand for dollars and rising depreciation pressures on the currency. Short-term swap markets show deeply skewed demand-supply conditions for the yuan, which could potentially lead to panic and spillovers to bond and equity markets.

CONTEXT

The onshore spot yuan is allowed to trade in a 2% range on either side of the official midpoint fixing set by the People's Bank of China (PBOC) prior to market opening.

Spot yuan contracts are settled two days after the trade date. But this trading band also applies to transactions settled on the same day, which are known as cash transactions, and to those settled on the following day, known in markets as 'tom' or tomorrow-value transactions. The settlements are officially referred to as T+0, T+1 and T+2.

BY THE NUMBERS

China's yuan has lost about 2% against the dollar so far this year.

The onshore yuan slipped to a low of 7.2467 on Friday, close to its weakest levels since November 2023.

Friday's PBOC fixing was 7.1056, meaning the downside limit for cash, tom and spot transactions is 7.2477.

However, the overnight swap rate was deeply negative at 22 points, meaning a T+0 or cash value of 7.2489, weaker than the PBOC's band. Traders said T+0 and T+1 settlements were impossible since trading in these contracts was halted after the yuan hit its downside limit. (Reporting by Shanghai Newsroom; Editing by Vidya Ranganathan and Jacqueline Wong)