China's yuan hit a four-year low on Wednesday, falling for a second day after authorities devalued it in a move that sparked fears of a global currency war and accusations that Beijing was unfairly supporting its struggling exporters.

Spot yuan in China fell to 6.45 per dollar, its weakest since August 2011, after the central bank set its daily midpoint reference at 6.3306, even weaker than Tuesday's devaluation.

The currency fared worse in international trade, touching 6.59.

The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.

"Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan," the People's Bank of China (PBOC) said.

Foreign exchange traders later said state-owned banks were selling dollars on behalf of the PBOC to keep the yuan around 6.43.

"Apparently, the central bank does not want the yuan to run out of control," said a trader at a European bank in Shanghai.

A trader at another European bank said the unexpected devaluation had caused "some panic" in markets.

"Although the central bank made explanations again today, stressing the yuan would not show sustained depreciation, the market is very jittery," he said.

Analysts at BMI downgraded their end-year forecasts for the currency to 6.83, down 10 per cent from pre- devaluation levels.

The yuan has lost 3.5 per cent in China in the last two days, and around 4.8 percent in global markets.

Its slide pulled down other Asian currencies on Wednesday, with Indonesia's rupiah and Malaysia's ringgit hitting 17-year lows, and the Australian and New Zealand dollars touching six-year lows.

Indonesia's central bank pinned the rupiah's fall directly on the yuan devaluation and said it would step into the foreign exchange and bond markets to curb volatility.

POOR ECONOMIC DATA

Tuesday's devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.

A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3 percent drop in exports in July and that producer prices were well into their fourth year of deflation.

China's Ministry of Commerce acknowledged on Wednesday that the depreciation would have a stimulative effect on exports.

Data released later in the day underlined sluggish growth in the world's second-largest economy. Factory output growth slipped to 6 percent in July from a year earlier, missing market forecasts, while fixed asset investment and retail sales were also lower than expected.

Data from the Finance Ministry showed a jump in fiscal expenditure of 24.1 per cent in July, which reflects Beijing's efforts to stimulate economic activity.

TRYING TO WIN OVER THE IMF?

The International Monetary Fund said China's move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.

Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.

"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said by email.

The devaluation was condemned by US lawmakers from both parties on Tuesday as a grab for an unfair export advantage and could set the stage for testy talks when Chinese President Xi Jinping visits Washington next month, given acrimony over issues ranging from cybersecurity to Beijing's territorial ambitions.

Not all countries consider the devaluation a threat, however. Korea's Finance Minister Choi Kyung-hwan said it would be positive for Korean exports to China, much of which were intermediate items and not in direct competition with Chinese products.

While a weaker yuan will not cure all the ills of China's exporters, which suffer from rising labour costs, it will help relieve deflationary pressure, a far bigger concern in the view of some economists.

Falling commodity prices have been blamed for producer price deflation, putting China at risk of repeating the deflationary cycle that blighted Japan for decades.

Growth in China, the world's second-largest economy, has slowed markedly this year and is set to hit a 25-year low even if it meets its official 7 per cent target.

Some economists believe China's economy is already growing only half as fast as official data shows, or even less. - Reuters