By Pete Sweeney

SHANGHAI, Jan 4 (Reuters) - The Chinese yuan is expected to log another year of mild strengthening in 2013, the official People's Daily newspaper reported, as market forces cooperate with policymakers to hold back aggressive appreciation.

The report, which quoted economists from domestic and foreign banks, is in line with previous official declarations that the currency has reached a market-driven equilibrium. It also accords with repeated commitments by Beijing to preserve the 'fundamental stability' of the exchange rate.

In 2012, the yuan appreciated 1 percent against the dollar, less than analysts had forecast at the start of last year.

Many mainstream economists and forex traders believe that the days of one-way yuan appreciation have already drawn to a close, pointing out that in the current economic and policy environment, the Chinese currency has become a much more volatile instrument.

China's current-account surplus as a share of gross domestic product, which foreign governments pointed to in the past as evidence that Beijing was suppressing the yuan's exchange rate, has narrowed significantly in recent years.

The surplus has dropped from more than 10 percent of GDP in 2007 to below 3 percent in the first three quarters of 2012.

As a result, the International Monetary Fund now describes the yuan as only 'moderately undervalued.'

At the same time, while China's economy continues to recover, few expect it to post an explosive turnaround in 2013.

Dariusz Kowalczyk, strategist at Credit Agricole CIB in Hong Kong, predicted appreciation of more than 2 percent for the yuan in 2013, which would put it at 6.1 per dollar by the end of the year.

'Stronger gains are unlikely given the shallowness of economic recovery,' he wrote in a research note distributed on Thursday.

A VOLATILE 2012

In the first seven months of 2012, the spot yuan actually lost 1.6 percent against the dollar in the face of the euro debt crisis.

The currency then recovered dramatically in the latter portion of the year as optimism about a soft-landing in China caused corporates to stock back up on yuan. The increased appetite combined with other factors to flood the domestic forex market with unwanted dollars, pushing the yuan to consecutive record highs against the dollar in November.

At that point, the People's Bank of China (PBOC) intervened to preserve stability, holding back the yuan through conservative midpoint settings.

Since last April, the exchange rate has been allowed to diverge by 1 percent above or below the official midpoint rate , double the previous range.

Chia Woon Khien, strategist for emerging Asia at the Royal Bank of Scotland, said that the central bank will likely widen the band again in 2013.

'Now it's 2 percent, plus or minus one, but that's not the last stop to a free float. I think there will be another half percent and another half percent.'

Such reforms, especially if combined with further liberalisations to China's capital account facilitating cross-border flows, would likely result in even more volatility in the exchange rate than seen in 2012.

Depreciation may also be in the cards. Traders say the yuan will likely move in a range between 6.1 and 6.3 in 2013, implying periods of appreciation and depreciation.

Offshore one-year non-deliverable forwards, which serve as an imperfect proxy for market expectations for yuan appreciation or depreciation, continue to forecast mild depreciation over the next 12 months.

The yuan has appreciated nearly 25 percent against the dollar since 2005.

(Additional reporting by Adam Jourdan; Editing by Richard Borsuk) Keywords: CHINA YUAN APPRECIATION/

(pete.sweeney@thomsonreuters.com)(+86 21 6104 1777 / +86 158 0188 9934)(Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net)

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