SHANGHAI (REUTERS, BLOOMBERG) - China accelerated the depreciation of the yuan on Thursday (Jan 7), sending currencies across the region reeling and stock markets tumbling, as investors feared the Asian giant was kicking off a trade war against its competitors.

Trading on China's stock markets was suspended for the rest of the day, for the second time this week, as a new circuit-breaking mechanism was tripped less than half an hour after the open.

Shanghai stocks slid 7 per cent to trigger the halt in trading, a repeat performance of Monday's sudden tumble. Japan's Nikkei slid 2.3 per cent in sympathy.

Chinese shares listed in Hong Kong slumped 4.3 per cent - the most since August - and the Hang Seng Index dropped 2.9 per cent.

The morning selloff accelerated in Singapore with the Straits Times Index down 2.3 per cent at 2,739.51 as at 2:45 pm. Benchmark indexes in Australia, South Korea and Taiwan lost more than 1 per cent.

The People's Bank of China (PBOC) again surprised markets on Thusrday by setting the official midpoint rate on the yuan, also known as the renminbi (RMB), at 6.5646 per US dollar, the lowest since March 2011.

That was 0.5 per cent weaker than the day before and the biggest daily drop since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets.

Regional currencies promptly went into a tailspin. The Australian dollar, often used by foreign exchange dealers as a liquid proxy for the yuan, fell half a U.S. cent in a blink.

The PBOC's China Foreign Exchange Trade System (CFETS) repeated on Thursday that there was no basis for the yuan's continuous depreciation and that it was stable against a basket of currencies in 2015.

But the central bank's fixings have helped drive the yuan down not just against the dollar this week, but also other major currencies, including a 3.5 per cent fall against the yen and 0.8 percent against the euro.

Markets are struggling to determine what policy Beijing is pursuing.

"Frankly speaking, we are still not quite sure where the PBOC boundary is at the current stage. The fear of the unknown has become the largest risk for RMB in the near term, despite China's sizable current account surplus," said Singapore-based Oversea-Chinese Banking Corporation (OCBC).

ANZ bank said in a note: "The policy action will also create one-way expectation of RMB depreciation, propelling capital flight and leading to significant financial instability."

This week's slide comes ahead of the expected release later in the day of China's foreign exchange reserve data for December, which traders fear will show a further sharp decline as investors pull money out of the slowing economy.

China's reserves, the world's largest, fell by US$87.2 billion in November to US$3.44 trillion, the lowest level since February 2013 and the third-largest monthly drop on record.

Some fear the yuan's quickening slide suggests the world's second-largest economy is in deepening trouble, though for now economists say there has been no material change in their expectations of a gradual but bumpy slowdown, with no hard landing.

A sustained depreciation in the yuan puts pressure on other Asian countries to devalue their currencies to stay competitive with China's massive export machine.

It also makes commodities denominated in US dollars more expensive for Chinese buyers, which could hurt demand and thus further depress commodity prices in a vicious chain reaction.

The halt mechanism, intended to calm market volatility, was having the opposite effect, according to a 22-year-old retail investor in Guangzhou surnamed Hu.

He said he bought shares on Wednesday when the market rebounded, but was now trapped by the circuit breaker, which he said was "killing investors" and creating panic.

China's securities regulator also unveiled new rules on Thursday to restrict selling by big shareholders who have been locked into their holdings for six months since Beijing banned them from offloading stocks to arrest a summer market crash.

In rules that take effect on Jan. 9, they can't sell more than 1 percent of a listed company's share capital every three months.

The new rules didn't go down well with investors. "This is crazy. Chinese regulators set off on this path in July and they cannot get out of it. They have ruined whatever hope investors still had in the market," said Alberto Forchielli, founder of Mandarin Capital Partners.