The onshore yuan finished the domestic trading session at 7.0166 per dollar, down nearly 0.3% on the day and the weakest such close since July 14, 2020. Its offshore counterpart was trading at 7.0316 around 0830 GMT.
Friday marked only the third time the tightly managed yuan has been allowed to breach the 7 mark since the global financial crisis of 2008, and in the past authorities have often been quick to step in and defend it.
Crossing the level could stoke fear of capital outflows just as authorities want to marshal resources to revive an economy reeling from COVID-19 outbreaks and a deepening property crisis.
Prior to the market open, the People's Bank of China (PBOC) set the yuan's midpoint rate at 6.9305 per dollar, 204 pips or 0.3% weaker than the previous fix.
The sizable pullback in Friday's fixing indicates the central bank might have allowed the yuan to cross the 7 mark, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
"As long as the pace of depreciation is not too fast and remains under control, it should be fine."
Several currency traders said they now see 7.1 to 7.2 per dollar as their next target, while 7 has turned into a resistance level, as broad dollar strength should continue to weigh on most emerging market currencies.
The last time the yuan broke 7 was in 2020 during the early days of the COVID-19 pandemic. It also briefly fell through that mark as the U.S.-China trade war intensified in 2019.
While the U.S. Federal Reserve and most other major central banks have been sharply hiking rates this year to battle inflation, China has been cautiously easing policy to shore up economic activity, wary of triggering capital flight, analysts say.
Highlighting outflow risks, official data showed overseas investors cut holdings of Chinese bonds for a seventh consecutive month in August.
Some better-than-expected economic data lent slight support to the currency, as factory output and retail sales growth surprised on the upside, shoring up the shaky recovery from the crippling effects of COVID curbs and heatwaves. But a prolonged property slump and cooling export demand are weighing on the outlook.
Several state media outlets published commentaries on the yuan that played down any significance of the key 7 level.
State broadcaster CCTV cited the foreign exchange regulator as saying the yuan's performance was much better than most other currencies over the past year.
The yuan has lost nearly 10% of its value versus the dollar so far this year, surpassing the record annual loss booked in 2015, when China engineered a sharp one-off devaluation that roiled global financial markets.
The currency is on course for its biggest annual loss since 1994, when China unified official and market exchange rates.
However, the yuan's value against currencies of its major trading partners has slipped only about 0.4%.
"Seven was basically just this psychological level that people were looking at, and the market was definitely more focused on (it) than the PBOC from a policy perspective," said Galvin Chia, emerging markets strategist at NatWest Markets.
"It's clear that in this round, there hasn't actually been a push back at a specific level, like a defence at a certain level. It's just pushing back on the weakness."
Guan Tao, global chief economist at BOC International and a former official at the State Administration of Foreign Exchange (SAFE), said there was no market panic during the recent sell-off.
"The government still has sufficient policy tools to deal with the risk of yuan overshooting to safeguard the smooth operation of the FX market," Guan added.
In moves that traders interpreted as attempts to slow the yuan's slide, the PBOC had been persistently setting firmer-than-expected guidance rates over the past few weeks, and it has also lowered the amount of foreign exchange that banks must set aside as reserves to stem excess weakness.
"I don't think the authorities have any particular line in the sand," said Khoon Goh, head of Asia research at ANZ.
"Obviously they don't want moves to be too extreme and so the fixings have been much stronger than expected, but it's really all about managing the pace of the moves."
(Reporting by Asian bureaus; Editing by Muralikumar Anantharaman and Kim Coghill)
