China's yuan firmed against the dollar on Monday after the central bank set a much stronger midpoint than the market had expected.

The People's Bank of China set the midpoint rate at 6.9312 per dollar prior to the market opening. That was stronger than traders' expectations of around 6.95. Monday's official guidance rate was 196 pips, 0.28 percent firmer than the previous 6.9508.

Traders say a deviation of more than 100 pips from market forecasts will discourage investors from testing lows in the yuan.