SHANGHAI, Jan 14 (Reuters) - China's yuan extended gains on Friday and ended domestic trading session at a 3-1/2-year high against the dollar, underpinned by persistent seasonal corporate demand ahead of the long Lunar New Year holiday and resilient trade data.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3677 per dollar, 135 pips, or 0.2%, weaker than the previous fix 6.3542.
The onshore yuan finished domestic trading session at 6.3435 per dollar, the strongest such close since May 14, 2018, compared with the previous late night close of 6.3602.
If it had retained all the gains made by the late night close, it would have booked the best week in nearly three months by advancing 0.53% to the dollar for the week.
Its offshore counterpart also strengthened and traded at 6.3450 around 0830 GMT.
China's trade surplus continued to widen in December, with exports slightly better than expected, buoyed by solid global demand.
"There are still downward pressures on USD/RMB in the near term," analysts at HSBC said in a note, adding that monetary policy divergence between China and other major economies may eventually drag the yuan.
"However, China's large trade surplus may take some time to narrow and the FX conversion rate in 1Q is usually higher than the annual average," they said.
Currency traders said corporate demand for the local unit was very strong on Friday afternoon, expecting the yuan may continue to draw support from such FX conversion by corporates ahead of the Lunar New Year.
There were signs of tightness in the onshore money market in the run-up to the week-long holiday, which starts on Jan. 31, which was supportive for the yuan, they said.
Investors are focused on whether the PBOC will lower the medium-term lending facility interest rate, currently 2.95%, on Monday, when the central bank is expected to roll over 500 billion yuan of these loans.
A Reuters survey showed China's central bank is expected to renew maturing medium-term loans and keep borrowing cost unchanged, although a rising number of market participants start to bet on a rate cut.
On Monday, China is also scheduled to release gross domestic product data.
Gross domestic product (GDP) likely expanded by 8.0% in 2021, according to the median forecasts of 62 economists polled by Reuters, slower than an 8.2% rise seen in October's forecast but still the highest annual growth in a decade.
The poll showed economic growth was likely to slow to 5.2% in 2022, before steadying in 2023.
Reporting by Winni Zhou and Andrew Galbraith; Editing by Simon Cameron-Moore and Subhranshu Sahu