(Yicai Global) June 27 -- The Chinese yuan has continued weakening against the US dollar, while dropping to a new low since last December, caused by the central bank's deflated midpoint rate and the strong greenback.

The offshore yuan depreciated to 6.59 against the US dollar on Tuesday, falling by more than 500 basis points. The onshore yuan has slid to 6.58 against the greenback, dropping by more than 300 basis points during the day. All this year's gains for the spot exchange rate have also vanished.

The People's Bank of China sets the midpoint rate every morning and traders can only trade up to 2 percent either side of it. The midpoint level now stands at a six-month low, which has led traders to believe the central bank may favor a weaker yuan to hedge against the brewing trade spat between the US and China.

The yuan's prolonged softening could cause a further sell-off in the mainland stocks for the market to go deeper into a bear zone and affect future initial public offerings, such as Xiaomi's upcoming China depositary receipts issuance on the A-share market.

According to PBOC's financial magazine, the persistent rise in the dollar is causing the redback to lose ground.

As the Federal Reserve is expected to raise interest rates again during the year, the Chinese currency may still face depreciation pressure, but it is unlikely that the yuan will continue to weaken sharply, said Ming Ming, the chief fixed-income analyst at CITIC Securities.

China's economic fundamentals still provide full support for the yuan's exchange rate so it is expected to remain relatively stable, the central bank added.

Editor: Emmi Laine