Mr Yi said the central bank is paying "close attention" to the market ructions and pledged to keep the yuan "generally stable at a reasonable level". Traders saw telltale signs of intervention by state banks to stabilise the currency through the swap markets. Beijing is clearly on edge. A report for the National Institution for Finance and Development last week said the situation was becoming dangerous, calling for prompt action to avert a breakdown in confidence. "We think China is currently very likely to see a financial panic," it said. Loading The report, since removed from the website, said leverage stock purchases had exploded to five trillion yuan ($1 trillion) and were storing up a repeat of the equity crash three years ago. The Chinese markets were already on edge even before Donald Trump stepped up his trade assault. Drastic curbs on shadow banking launched last year are biting hard after a delay. The growth of fixed asset investment has been running at 6.1 per cent so far this year, the lowest since data began in 1998. "This is very disturbing. Prepare for the worst," said Wang Yiming, vice-minister of the Research Development Council.

The PBOC stepped in after the yuan weakened to an 11-month low of 6.73 against the dollar on the offshore market in Hong Kong. Chinese investors are acutely sensitive to the yuan-dollar rate. Nomura warned of "substantial capital flight" if markets begin to suspect that the PBOC is either pursuing policy of benign neglect, or even driving down the currency the deliberately as a form of covert retaliation against Washington. Nomura's Craig Chan said there is the risk of "non-linear" rupture that forces Beijing to take drastic action, with full-blown financial contagion across East Asia. Mark Williams from Capital Economics said there are limits to benign neglect. "Tolerance will probably only go so far, given the painful experiences of 2015 and 2016: any benefit to exporters would be swamped if depreciation triggered economic and financial instability," he said. China;s sharemarket is in bear territory. Credit:AP The currency slide has been happening in tandem with an equity crash. The Shanghai Composit e index has dropped 22 per cent since peaking in late-January and is a full-fledged bear market. Mr Williams said the "national team" - a nexus of pension funds and state owned entities - will step in to buy equities if the picture deteriorates. Whatever happens, developers are "heading for trouble" as regulators curb short-term dollar loans on the offshore market.

Contagion has spread to Hong Kong's Hang Seng index, down 15 per cent this year. Three-month HIBOR lending rates have rocketed 110 basis points since April, a vivid display of what can happen when the US Federal Reserve tightens monetary policy and drains global dollar liquidity. The Hong Kong Monetary Authority has had to intervene repeatedly over recent weeks to defend the dollar peg. The incipient credit crunch threatens to puncture the overheated property market. The Bank for International Settlements says Hong Kong's "credit gap" - a bubble gauge - is the world's most extreme and three times over the danger line. Loading Any form of currency warfare against the US by China would backfire through multiple channels. Capital outflows would squeeze liquidity and have contractionary effect. "This is not a can of worms that Beijing wants to open again," said JP Morgan. Yet the PBOC might nevertheless let the yuan slide further than investors think. "They will try to manage the pace of depreciation, but they will tolerate a lower currency," said Geoffrey Yu from UBS. Mr Yu said capital controls are tighter than during the 2015-2016 crisis. There are strict limits on bank card withdrawals outside the country.

The latest round of the US-China trade war will come to a head on Friday when the two sides impose tariffs of $US34 billion on each other's goods. Mr Trump has threatened to raise barriers on the entire gamut of Chinese exports if there is tit-for-tat retaliation. Yet he continues to send mixed signals. He has pulled back from sweeping investment curbs on Chinese companies. Bowing to Congress, he has agreed let the Committee on Foreign Investment in the US screen security threats. Mr Yu said China will try to dampen tensions. "They will aim for the moral high ground and fly the flag for free trade. The goal is to keep channels open to the US," he said. Hans Redeker from Morgan Stanley said Mr Trump is alert to stock market moves and is likely to retreat if his trade rhetoric alarms Wall Street. The greater danger is that the Fed continues to ratchet up interest rates and pushes the dollar higher. "The stronger the dollar, the more difficult for China. It tightens global financial conditions," he said. The Fed halted its tightening cycle in early 2016 when the Chinese currency crisis threatened to spin out of control. This bought vital time for China to restore calm. It is a different picture today. The Powell Fed is more hawkish. The US economy is closer to overheating. The Trump tax package is drawing US corporate funds overseas back into the US. And there is a trade war. China - and the world - may be facing a perfect storm. Telegraph, London