Any further selloff could also create problems for Chinese property developers and other corporate borrowers who have borrowed heavily overseas, since their earnings are largely in yuan while their international borrowings are mostly in dollars.

Chinese companies had nearly $900 billion of dollar-denominated debt securities outstanding at the end of March, nearly three times the amount five years ago, according to data from the Bank for International Settlements.

Despite Beijing’s strict capital controls, China could experience capital flight if the yuan weakens further, some observers say.

Louis Kuijs, head of Asia economics at Oxford Economics, said policy makers wouldn’t be comfortable with a major weakening of the yuan, given concerns about triggering large outflows.

“People in China tend to take weakening of the currency as a harbinger of more such weakening to come,” he said. “That is a reason for some to shift money abroad.”

Eoin Treacy's view

Amid the platitudes about having confidence in its ability to deter capital flight, the fact US Dollar denominated debt has continued to trend higher since it was banned more than a year ago should give policy officials pause. China needs a weaker currency and we are unlikely to see it trade stronger than CNY7 any time soon. The bigger question is how long it will take to hit CNY8.

Rising food inflation, falling domestic consumer demand and falling demand for commodities spell a problem for China’s government. They represent the sharp edge of a slowing domestic economy as the boom years give way to a secular trend of slower growth. Reliance on a domestic consumer demand story that is probably still not mature enough to compensate for the decline of infrastructure development represents an issue which the government has not yet shown a willingness to match with bold actions.