SHANGHAI: China's yuan held steady against the dollar in holiday-thin trade on Thursday, with a weaker-than-expected official midpoint fixing limiting the upside for the local currency.

However, the yuan is on course for a second year of gains in 2021 to become the best performing emerging market currency.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3674 per dollar, 61 pips firmer than the previous fix of 6.3735, but it was not as strong as markets had projected and discouraged investors from chasing highs in the yuan, traders said.

Thursday's guidance rate was 81 pips weaker than Reuters' estimate of 6.3593.

In the spot market, the onshore yuan opened at 6.3688 per dollar and was changing hands at 6.3689 at midday, 9 pips weaker than the previous late session close.

The PBOC has in the past two months sent a string of signals via weaker-than-expected official midpoint fixings and by raising reserve requirement ratio (RRR) on FX deposits to rein in the yuan, which has been underpinned by higher FX settlement due to robust exports and a growing trade surplus.

"In an environment of tightening global monetary policy, we believe it will be difficult for China to sustain its high export growth," analysts at CICC said in a note.

"If export growth slows, the valuation of the CNY effective exchange rate could face downward pressure," they said, expecting the yuan to retreat to 6.65 per dollar at end-2022.

Economists at OCBC Wing Hang Bank also said rising expectations for monetary easing including more RRR and interest rate cuts to tackle increasing downside pressure on the Chinese economy next year, when the US Federal Reserve is set to raise rates, could drag the yuan down in the medium-term.

Such expectation of additional easing measures by the PBOC pulled the forwards lower, with the one-year dollar/yuan swaps falling to 11-month low this week.

By midday, the broad dollar index stood at 95.966, while the offshore yuan was trading at 6.369 per dollar.