China yuan drops to four-month low, state banks step in

The yuan has fallen more than 2% in three months, and has been pressured by growing market expectations of further monetary easing to prop up the world's second-largest economy.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate , around which the yuan is allowed to trade in a 2% band, at 7.1004 per dollar, 62 pips weaker than the previous fix of 7.0942.

The Chinese central bank has for months been setting the rate at levels firmer than market projections, traders said.

Friday's midpoint was 1,143 pips firmer than a Reuters estimate of 7.2147, the biggest discrepancy since November.

The offshore yuan meanwhile continued to weaken to hit a more than four-month low of 7.2525.

The sudden burst of weakness in the yuan weighed on stock markets too, with the benchmark Shanghai stock index down 1.4%

Traders attributed sudden weakness in the yuan to rising monetary easing expectations after senior PBOC officials hinted at there being further room to reduce bank reserve requirements.

China has room to further cut banks' reserve requirement ratio (RRR), among other policy tools at its disposal, a deputy central bank head said on Thursday, underlining market expectations for more easing measures to bolster the economy.