By Lingling Wei

BEIJING -- A more hawkish U.S. Federal Reserve is presenting China's central bank an urgent task: How to stabilize expectations for the yuan?

"The most pressing demand of the day is to break the renminbi's one-way depreciation expectations," Sheng Songcheng, a senior adviser at the People's Bank of China, said in an interview.

Renminbi, or the people's currency, is another name for the yuan. Mr. Sheng suggested that the central bank dig further into its foreign-exchange reserves to help defend the yuan and "maintain market confidence."

As the dollar surged after the Fed's decision to raise interest rates, the yuan tumbled to the lowest level against the greenback inmore than eight years Thursday, extending a rapid decline in recent weeks and bringing its loss to about 4% since the beginning of October. As of 4:30 p.m. Beijing time, one dollar buys 6.9354 yuan. The Chinese currency is now down 6.7% against the dollar this year.

Worries over further weakening of the yuan -- likely to be triggered by a faster pace of rate increases in the U.S. -- have also spilled over to Chinese stocks and bonds, which have already suffered selloffs in recent days as China's financial regulators tightened liquidity in the markets. In a blunt editorial Thursday, China's official Xinhua News Agency urged the U.S. to "attach full importance to the possible spillover" effects of its monetary policy and to "coordinate with other major economies on macro policies."

Driven by the roaring dollar, the yuan's recent faster-than-expected depreciation also reflects bigger concerns among Chinese policy makers about the country's economic situation. The authorities have shown a greater tolerance of a cheaper yuan as Beijing combats a lagging economy and growing asset bubbles.

Exporters such as Sunstone Development Co., which makes carbon blocks used in the production of aluminum and sells a third of its products overseas annually, are among those who have benefited from a lower yuan, which makes Chinese goods cheaper in foreign markets.

Lang Guanghui, Sunstone's chairman, said thanks to the yuan's decline, the company expects to generate about 20 million yuan ($2.9 million) in additional profits this year. "As renminbi continues to depreciate, the more we delay converting our dollar income to renminbi, the greater profits we make," Mr. Lang said.

But the weakening yuan is also causing more money to leave China, resulting in an increasingly vicious cycle between currency depreciation and capital outflows. The Institute of International Finance, a Washington-based group of global financial institutions, estimates that net outflows last month could have been as large as $115 billion, nearly triple its projected $42 billion in October.

Among those rushing for the exit, economists and officials say, are cash-rich companies and individuals scouring the globe for better returns. The rapid run-up in property prices in many cities this year, for instance, is sending more Chinese looking to foreign markets to park their money, exacerbating outflows that further drive down the yuan.

To keep money at home, the authorities in recent days have imposed fresh capital controls -- just a month after the yuan joined the International Monetary Fund's elite basket of reserve currencies. The government has put in place new rules aimed at slowing overseas investments by Chinese companies. In addition, regulators have instructed banks to limit sharply how much companies, both foreign and Chinese, move out of the country and into their other operations around the world.

Chinese officials say those controls are meant to be temporary measures intended to stabilize outflows and the yuan. They stress Beijing has changed its long-term goal of promoting the Chinese currency's use world-wide.

Despite the tightened controls, the potential for more rate increases in the U.S. could lead more funds to flow out of China, economists say. That would present a big headache for China's central bank as it seeks to balance the need to maintain ample market liquidity to support the economy and the need to keep burning through the currency reserves to prop up the yuan, which would cause a shortage of liquidity in the country's financial markets. The central bank conducts such interventions by selling dollars and buying yuan, which effectively drains yuan funds from the financial system.

"If this dollar continues to soar, it will aggravate thePBOC's policy headache," said Chi Lo, China economist at BNP Paribas Investment Partners, the asset-management arm of the Paris-based bank. "A rising dollar will put more downward pressure on the yuan, prompting more intervention by the PBOC, and that in turn will create more passive liquidity contraction in the Chinese system," he said.

Market speculation is also growing that China would move to tighten its monetary policy to stem outflows, stabilize the yuan and curb inflation. Mr. Sheng, the adviser at the central bank, said China could consider raising interest rates "at an appropriate time, but not now," noting that China's economy is just showing signs of stabilizing.

"Let's see how the U.S.'s rate-increase projections work out," he added.

Write to Lingling Wei at lingling.wei@wsj.com

(END) Dow Jones Newswires

December 15, 2016 11:13 ET (16:13 GMT)

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