The yuan fell to its weakest level against the US dollar since April yesterday, breaching the psychological level of 6.20 against the greenback, but market players fear the correction is not over yet.
In three days of trading since the central bank doubled the trading band for onshore yuan, the currency has fallen 0.8 per cent against the US dollar - more than a quarter of last year's gain - as investors sold yuan amid soft macroeconomic data and mounting mainland credit risks.
The onshore yuan fell as much as 0.25 per cent, or 153basis points, to 6.2081 against the US dollar in the spot market yesterday. By the close, onshore yuan stood at 6.1957 against the dollar, an 11-month low, and offshore yuan stood at 6.1870.
The market, including both foreign exchange and equity investors, reacted strongly to the yuan's fall yesterday, fearing the People's Bank of China is being more hawkish in its monetary policy, regardless of short-term pain to the economy or investors.
"The PBOC set the mid-point rate for renminbi at weaker-than-expected levels in the past two trading days - they were not defending the renminbi as the market thought they would be," said Ju Wang, senior Asian FX strategist at HSBC. "We see more near-term weakness, for the currency, with the yuan to potentially test a new upper trading band of 6.25 against the dollar."
The overnight Shanghai Interbank Offered Rate, measuring short-term liquidity in the mainland's money market, rose to a one-month high yesterday after the mainland had its second onshore bond default this year.
The benchmark Shanghai Shenzhen CSI 300 Index, tracking the 300 top firms listed on the two cities' main boards, lost 0.81 per cent yesterday to end at 2,120.87. The Hang Seng Index lost 0.07 per cent to finish at 21,568.69.
The PBOC said on Saturday it would let the onshore yuan spot rate float 2 per cent either side of its daily reference fixing - double its earlier 1 per cent trading band.
The yuan's fall has nearly wiped out last year's gain when onshore yuan rose 2.9 per cent and offshore yuan 2.2 per cent.