China forces weaker yuan, but spot traders still aren't buying

* PBOC sets weaker midpoint for third day

* Rate hits strong side of band for 5th straight day

* Spot yuan still near record high against dollar

* seen intervening to drag yuan into weaker territory

SHANGHAI, Nov 5 (Reuters) - China's central bank set the yuan midpoint weaker for the third consecutive trading day on Monday, but customers continued to unload dollars, causing the spot rate to repeatedly bump into the limit of its trading band.

``This is market-driven behavior,'' said a trader at a Big Four Chinese bank in Beijing, in reference to the spot price's reluctance to follow the regulator's guidance.

He and other analysts said that corporate customers continue to sell off dollars accumulated in the first half of the year as the yuan lost value against the dollar, causing the traded value of the yuan to increase.

But political considerations were limiting room for further strengthening, he said.

``(The government) should be putting stability first in the runup to the Party congress. I don't think there's much basis for further strengthening, and this might be an opportunity to invest in a reversal.''

The congress, which will usher in a generational leadership change, opens on Thursday.

The central bank set its midpoint at 6.3082 per dollar, following a strong uptick in the value of the dollar index. The spot exchange rate is allowed rise or fall 1 percent from the midpoint each day, and when the midpoint is aligned with market sentiment, spot prices tend to trade within this range.

However, as the spot has successively set new record highs against the dollar, some say the midpoint has become the regulators' way to signal for restraint. The People's Bank of China has kept the midpoint virtually flat since Oct. 17.

``The PBOC is really in the driving seat; the fix is in the driving seat,'' said Robert Minikin, senior forex strategist at Standard Chartered, pointing out that Monday's midpoint was set so that Friday's closing spot price (6.2415 per dollar) was already outside of the 1 percent band at market open.

Many market observers have argued that Beijing provoked or tolerated the recent climb of the yuan against the dollar in order to sabotage candidate Mitt Romney's vow to label China a currency manipulator on his first day in office.

But a strong yuan also hurts exporters, and the prospect of uncontrolled appreciation driven by currency strategies at opaque state-owned giants (such as banks and oil companies) could destabilise the wider economy.

The yuan opened at 6.2460 per dollar, weaker than Friday's close but still close to the edge of the trading band. It quickly firmed in morning trade and began repeatedly bouncing off of the trading limit around 11 a.m.

(Editing by Kim Coghill)