The devaluation of the yuan is mainly driven by rapidly rising interest rates in the United States, which leads investors to convert money into dollars in the quest for better returns.

A weaker yuan helps Chinese exporters by making their products cheaper in foreign markets, but it encourages capital flight. This increases financing costs for Chinese companies and slows the Communist Party's efforts to boost the country's economic growth.

One dollar was worth 7.2301 yuan today - the lowest level of the Chinese currency since January 2008, and a drop of 15%, from the peak reached last March.

In contrast to the US Federal Reserve, which has raised interest rates five times this year aimed at fighting inflation, the People's Bank of China has cut interest rates to boost economic growth, which has fallen to 2.2%, year-on-year, in the first six months of 2022 - less than half of the official target of 5.5%.

The yuan's parity rate against the dollar is based on the average of the prices offered before the opening of the interbank market and can fluctuate by a maximum of 2% per day. This avoids large daily swings, but several consecutive falling days can result in significant changes.

To bolster the exchange rate, Beijing cut the amount of foreign currency deposits that Chinese banks must hold as reserves from 8% to 6% in mid-September. By increasing the amount of dollars and other foreign currencies available to buy yuan the authorities aimed to appreciate the Chinese currency.

But this cut in reserves is unlikely to halt a decline driven by "a strong US dollar and expectations of further interest rate hikes by the Federal Reserve," Iris Pang of Dutch investment bank ING pointed out in a report.

"A less aggressive tone on the possibility of raising interest rates" may help the yuan rise, but if the "Federal Reserve maintains a very aggressive tone," next year, the Chinese currency is likely to depreciate further, he predicted.

The Chinese authorities had already promised to avoid a "competitive devaluation" in order to gain trade advantages.

The yuan sank in 2019 after previous US President Donald Trump launched a trade war against Beijing. This led to suggestions that China was trying to reduce the impact of increased tariffs imposed by Trump on goods from the Asian country.

The currency, however, has recovered from this devaluation.

Other central banks are also trying to stem the capital flight caused by interest rate increases in the United States, including the European Central Bank. (Lusa)