Market resistance to the PBOC rate keeps yuan trading in deadlock

* Yuan weakens as cbank sets lowest fix in two weeks

* Spot trade again at limit up as deadlock persists

* Traders say clients want to trade at offshore rate

* Yuan in Hong Kong trades 150 pips firmer than onshore

* Moderate appreciation at year-end could break deadlock

SHANGHAI, Dec 6 (Reuters) - The People's Bank of China forced the yuan to weaken against the dollar on Thursday, but trading remained deadlocked at the day's limit-up level as the market baulked at doing transactions at the rates decided by the central bank, traders said.

The yuan was pushed weaker by the PBOC setting its daily midpoint at 6.2911 versus the dollar, its weakest fix since Nov. 22 and much softer than Wednesday's fix of 6.2871.

The PBOC permits the exchange rate to rise or fall by no more than 1 percent from the base rate it sets each morning.

The yuan opened at its limit-up level of 6.2282 and stayed there nearly all morning, compared with 6.2253 at the close on Wednesday, when suspected PBOC intervention enabled the yuan to drift slightly away from the upper limit in the final minutes before the end of trading.

"Our clients refuse to trade yuan/dollar at the PBOC's decided rates," said a dealer at a U.S. bank in Shanghai. "Instead, they hope to trade at the CNH (offshore) levels."

CNH, the name for yuan traded in Hong Kong, where the PBOC cannot control the rate, was stronger than in Shanghai. At midday, it was trading at 6.2130 against the dollar, after moving in a range of 6.2100 to 6.2150. So with the PBOC restrictions, the Shanghai market wants a premium of around 150 pips for spot yuan.

In Shanghai, trading was sluggish again on Thursday, with volume falling to a recent low of $193 million in the morning session, down from $1.5 billion on Wednesday morning. The market's average full-day volume was $13.9 billion in the first nine months of this year.

Traders expect the low trading volumes in the onshore market to prevail until the end of this year or early 2013, with the PBOC leaving it to the market to whittle down an overhang of dollars.

The overhang stems from long dollar positions built up in the first half of the year, when the yuan was weakening.

Traders say the market is hoping that the central bank gives way by either adjusting the daily trading range to let the yuan strengthen, or by buying large amounts of dollars.

But so far, the PBOC has only appeared to buy when the market's illiquidity became pronounced. Some traders suspect that the PBOC may be worried that it will lose control of China's exchange rate once it makes concessions to the market.

However, both sides may reach a temporary agreement late this month. The central bank typically guides the yuan higher in last few weeks of a year -- possibly in order to meet pre-determined annual appreciation targets and deflect U.S. criticism that the Chinese currency is undervalued.

Traders expect the PBOC to let the yuan strengthen slightly to around 6.2 by the end of this year. That may be sufficient to break the deadlock.

But if this degree of appreciation isn't enough, many traders expect the central bank to shift its strategy early next year, mostly likely by injecting yuan liquidity into the market, rather than allowing additional appreciation.

In China's rigid foreign exchange regime, the PBOC has always been the ultimate supplier of liquidity. But traders say the PBOC now appears determined to reduce its interventions in the market, even if it must endure a period of weak liquidity.

The yuan now stands 1.1 percent up against the dollar for the year so far, rallying 2.7 percent from its low for the year in late July.

(Editing by Richard Borsuk)