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China's yuan weakens on light trade, dragged by corporate dollar demand

SHANGHAI, Dec 27 (Reuters) - China's yuan weakened against the U.S. dollar in light trading on Wednesday, dragged lower by a softer fixing and rising corporate demand for the greenback, traders said. The global dollar index, a gauge that measures the greenback against six other currencies, was little changed at 93.27 as of midday, from the previous close of 93.257. Prior to market opening on Wednesday, the People's Bank of China set the midpoint rate at 6.5421 per dollar, 5 pips weaker than the previous fix of 6.5416 on Tuesday, which was the strongest since Sept. 13. In the spot market, the onshore yuan opened at 6.5440 per dollar and was changing hands at 6.5554 at midday, 104 pips weaker than the previous late session close and 0.20 percent softer than the midpoint. Traders said recent illiquid conditions seen in the market in the past few sessions were likely to persist for the rest of the week. The daily trading volume stood at $8.054 billion as of midday, which compares with roughly $15 billion seen around the same time on most days. A foreign exchange analyst at a Chinese bank said low trading volume could lead to huge price swings with many market participants already on holiday. Traders said they do not expect the yuan to strengthen past 6.5 per dollar level in coming days as their corporate clients' swoop in to pick up cheaper greenbacks. Mainland Chinese residents have an annual $50,000 foreign currency conversion quota, which is reset on Jan. 1 every year. However, market participants said they are not worried the renewal of the quota would trigger strong dollar buying with market expectations that the yuan will strengthen slightly in 2018 likely to support demand. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.81, firmer than the previous day's 95.76. The offshore yuan was trading 0.04 percent firmer than the onshore spot at 6.553 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.7025, 2.39 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0417 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.5421 6.5416 -0.01% Spot yuan 6.5554 6.545 -0.16% Divergence from 0.20%

midpoint*

Spot change YTD 5.97% Spot change since 2005 26.25%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.81 95.76 0.1

Reuters/HKEX CNH index

Dollar index 93.27 93.257 0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.553 0.04% * Offshore 6.7025 -2.39%

non-deliverable forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

(Reporting by Winni Zhou and Brenda Goh; Editing by Sam Holmes)