SHANGHAI, Jan 5 (Reuters) - China's yuan eased against
the dollar on Friday, as a widening  yield spread and balance
sheet policy divergences between the U.S. and China remained
short-term headwinds for the yuan. 
    The yield gap between China's 10-year government bonds
 and its U.S. counterparts has widened by
24 basis points (bps) since Dec. 27 to 144 bps, with the market
repricing the U.S. Federal Reserve's policy easing and
expectations for rate cuts in China continuing to build.
    The yield on actively traded 10-year China government bonds
 touched the lowest point since April 2020 on Friday.
    The ongoing divergence in the balance sheet policies of the
Fed versus the People's Bank of China (PBOC) is a significant
short-term headwind for the offshore yuan, traders at Citi said,
adding that they expect further interest rate cuts and
additional loan injections via China's pledged supplementary
lending (PSL) facility.
    China's central bank made 350 billion yuan  ($48.83
billion)in loans to policy banks through its PSL facility in
December, fuelling expectations of increased support for the
country's ailing housing sector.
    "However, we expect onshore exporter USD holdings, which
look abnormally large this year, to be converted to the yuan
ahead of the Lunar New Year, which should drive the yuan
stronger against the dollar towards the end of January or the
first week of February," the traders said. 
    Prior to the market's opening, the PBOC set the midpoint
rate, around which the yuan is allowed to trade in a
2% band, at 7.1029 per U.S. dollar, 33 pips weaker than the
previous fix 7.0997. 
    The spot yuan opened at 7.1675 per dollar and was
changing hands at 7.1684 at midday, 64 pips weaker than the
previous late session close. 
    The global dollar index rose to 102.457 from the
previous close of 102.422. 
    Investors are watching U.S. payrolls data later in the day
to gauge the Fed's policy path, which could also affect the
yuan-dollar pair.
    The offshore yuan was trading 99 pips weaker than
the onshore spot at 7.1783 per dollar. 


    The yuan market at 0333 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      7.1029   7.0997    -0.05%
                                       
 Spot yuan          7.1684   7.162     -0.09%
                                       
 Divergence from    0.92%              
 midpoint*                             
 Spot change YTD                       -0.98%
 Spot change since 2005                15.46%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson                               0.0
 Reuters/HKEX                          
 CNH index                             
 Dollar index    102.457     102.422   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% from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    7.1783    -0.14%
        *                        
 Offshore              6.991     1.60%
 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.
. 


($1 = 7.1677 Chinese yuan renminbi)

 (Reporting by Li Gu; Editing by Sonali Paul)