SHANGHAI: China's yuan was largely flat against the dollar in holiday-thinned trade on Friday but looked set for its second straight year of gains in 2021.

The Chinese currency is set to gain about 2.5% against a rising dollar this year to become the best performing emerging market currency, underpinned by robust exports, a growing trade surplus, steady capital inflows into Chinese assets and ample dollar liquidity onshore.

The yuan's trade-weighted value against major trading partners also rose to six-year highs and gained 8.05% for the year.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3757 per dollar, 83 pips or 0.13% weaker than the previous fix of 6.3674.

In the spot market, the onshore yuan opened at 6.3750 per dollar and was changing hands at 6.3737 at midday, 6 pips weaker than the previous late session close.

With many market participants already on their year-end holidays, trading was quiet and tepid on the last day of the year, traders said.

Despite the strong gains this year, major investment houses' forecasts for the yuan in 2022 are divided.

Some market analysts said supportive factors such as corporate FX settlements were likely to persist before the Lunar New Year holiday in early February, when companies would have higher yuan demand to make various payments.

"We expect the net FX sales will fall after the Lunar New Year holiday in 2022 to trigger a 'turnaround' in the yuan exchange rate," said Marco Sun, chief financial markets analyst at MUFG Bank, expecting the yuan to trade in a range of 6.3 to 6.5 per dollar in the first quarter.

Economists at OCBC Wing Hang Bank said broad dollar strength could start to pressure the yuan.

"We expect the yuan exchange rate to have higher flexibility in 2022 against the backdrop of depreciation pressure prompted by the Federal Reserve's interest rate hike, but the chances of one-way continued depreciation is not high," they said in a note.

Separately, some traders and economists are wary of possible measures to rein in yuan strength amid worries it could hurt export competitiveness. A senior official said China would face "unprecedented" difficulty in stabilising trade next year.

The yuan dipped earlier this month after China cut its lending benchmark loan prime rate (LPR) for the first time in 20 months, in a bid to prop up the slowing economy. Some analysts expect Beijing could ease further in 2022 to arrest the slowdown, although they remain divided over the easing trajectory.

By midday, the broad dollar index rose to 96.04 from the previous close of 96.006, while the offshore yuan was trading at 6.3746 per dollar.