China sets yuan weaker, but spot prices still reluctant

* PBOC sets weaker midpoint for third day

* Spot rate scrapes strong side of band for most of the day

* Spot yuan still near record high against dollar

* seen intervening to drag yuan into weaker territory

(Updates to close)

SHANGHAI, Nov 5 (Reuters) - The yuan closed down slightly on Monday but its weakness was largely imposed by the central bank, which fixed a softer midpoint even as customers continued to unload dollars.

As a result, the spot exchange rate diverged from the official fix and continued to bump along the strong-side edge of its trading band.

The dollar/yuan rate is allowed to rise or fall 1 percent from the midpoint each day; when the midpoint is aligned with market sentiment, spot prices tend to trade within this range. But in past weeks the spot market has been highly bullish on the yuan, repeatedly pushing it against the strong side of the 1 percent limit.

Despite an overnight spike in the dollar index which showed a strong positive response to a U.S. jobs report, Chinese corporates continued to move toward long yuan positions.

``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 hit its strongest point since the domestic currency market was launched in 1994 on Oct. 31, when it changed hands at 6.2372 per dollar.

But political considerations were starting to come into play, 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 People's Bank of China (PBOC) set its midpoint at 6.3082 p er dollar on Monday morning. The bank has kept the midpoint virtually flat since Oct. 17, which traders say is a signal from regulators that further appreciation is unacceptable.

The yuan closed at 6.2454 per dollar, 3 pips from the edge of the trading band.

``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, forcibly softening the spot market right off the bat.

(Editing by Kim Coghill)