Growth in China's vast factory sector slowed to a three-month low in August as output and new orders moderated, a preliminary private survey showed on Thursday.
After a hopeful bounce in June, spurred in large part by government stimulus, China's economic growth appears to be softening again, with indicators ranging from lending to output and investment all pointing to weakness.
On Friday, the People's Bank of China set the yuan midpoint at 6.1617 per dollar prior to the market open, marginally stronger than 6.1632 on Thursday, which was the weakest level in two weeks. The currency is allowed to trade in a 2 percent band around the midpoint.
The yuan was trading at 6.1596 in late morning trades,
weaker than Thursday's close for 6.1514 and set for its first weekly loss since the third week of June, according to Thomson Reuters data.
Still, the yuan's decline has been orderly as evident from the narrowing spreads between the offshore and the onshore market, unlike the panicky wide spreads seen earlier this year.
The US dollar's resurgence this week following upbeat housing data and hawkish-sounding Fed minutes has led to more caution over the outlook for emerging market currencies.
The dollar hovered below its 2014 peak against a basket of major currencies early on Friday, with bulls pausing ahead of a speech by Federal Reserve Chair Janet Yellen.
Barclays analysts said in a note the policy support cautiously rolled out by Beijing since March have benefited large enterprises while the businesses and financing environment for the small business sector hasn't improved significantly.
That opens up the possibility of interest rate cuts in the second half of the year with the bank's strategists expecting two cuts in benchmark interest rates before the end of the year.
If those cuts do materialise it could erode support for the Chinese currency, as they would remove some of the attractions that helped revive carry-trade seeking inflows evident since the yuan began stabilising in June.