China's yuan fell to its weakest level in eight and a half years on Thursday after the U.S. Federal Reserve signalled a faster pace of rate hikes, raising concerns of more capital outflows at a time when Asia's economic powerhouse shows signs of stabilising.

On-shore yuan closed at 6.9354 a dollar Thursday, plunging 305 points from the previous close. It came even as state-owned banks sold dollars and the authorities stepped up their defence.

Borrowing rates for the yuan rose in both onshore and offshore markets, suggesting the authorities were trying to discourage speculative short-selling of the currency.

Analysts also say liquidity is generally tight towards the year end, especially amid a plunge of government bonds.