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By Georgina Lee HONG KONG, Dec 30 (Reuters) - China's yuan firmed against the U.S. dollar on Friday, but looked set to post its biggest annual loss since 1994 as tough anti-COVID measures battered the world's second-largest economy and a wave of new infections clouds the outlook for recovery. Having kept its borders all but shut for three years, imposing a strict regime of lockdowns and relentless testing, China abruptly reversed course toward living with the virus on Dec. 7. Fresh cases are now erupting across the country, threatning further economic disruptions. The spot yuan opened at 6.9555 per dollar and was changing hands at 6.9585 at midday, 66 pips stronger than the previous late session close and -0.09% away from the midpoint. The People's Bank of China set the midpoint rate at 6.9646 per U.S. dollar prior to market open, firmer than the previous fix 6.9793. The spot rate is allowed to trade with a range 2% above or below the official fixing on any given day. But the onshore yuan looked set to depreciate by 8.7% against the dollar for the year-to-date, its worst performance since 1994 when China unified market and official rates. Still, "there is a silver lining going into 2023. Given how renminbi assets have suffered from a broad sell-off in 2022, foreign investors' allocation to Chinese assets is currently at historical low," said Christopher Wong, FX strategist at OCBC Bank. China's reopening of its economy has injected optimism that would support portfolio inflows and the yuan, he said. OCBC expects the yuan to finish the year at 6.98; and gradually recovers to 6.90 at the end March, and 6.75 by the end of 2023. COVID infections started to sweep across China in November and picked up this month after Beijing dismantled its zero-COVID policies, including regular PCR testing on its population and publication of data on asymptomatic cases. While China reported one COVID death recorded on Thursday, UK-based health data firm Airfinity estimates that about 9,000 people are dying each day from COVID. Still, foreign inflows into Chinese assets could quickly return, if China’s GDP data next year shows its economic growth is stabilizing, said Chi Lo, Asia Pacific senior market strategist at BNP Paribas Asset Management. “Now the biggest unknown is the risk of the government reimposing its mobility restriction measures if there was a resurgence of COVID cases after the Chinese new year to prevent overwhelming its medical system,” he said. The global dollar index rose to 103.948 from the previous close of 103.836. The offshore yuan was trading 0.16% weaker than the onshore spot at 6.9695 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.8035, 2.37% away from the midpoint. One-year NDFs are settled against the midpoint, not the spot rate. The yuan market at 3:22AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 0.21% 6.9646 6.9793 Spot yuan 0.09% 6.9585 6.9651 Divergence from midpoint* -0.09% Spot change YTD -8.67% Spot change since 2005 revaluation 18.94% OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan * -0.16% 6.9695 Offshore non-deliverable 2.37% forwards 6.8035 ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Georgina Lee; Editing by Kim Coghill)