Beijing, Aug 13 (IANS): The Chinese currency continued its sharp fall for a third consecutive day on Thursday after the central bank reformed the exchange rate formation system.

The central parity rate of the yuan weakened by 704 basis points, or 1.1 percent, to 6.401 against the US dollar, Xinhua news agency cited from the China Foreign Exchange Trading System.

On Tuesday, the People's Bank of China reformed the exchange rate mechanism to better reflect market development in the exchange rate of the Chinese yuan against the US dollar.

The move surprised the market and prompted the lowest valuation of the yuan since October 2012. The central parity rate of the yuan against the US dollar weakened by 1,136 basis points on Tuesday and further dipped 1,008 basis points to 6.3306 on Wednesday.

"The central bank is fully capable of stabilizing the exchange rate through direct intervention in the foreign exchange market to avoid herd mentality leading to irrational movements of the rate," economist Ma Jun with the People's Bank of China said in an interview with China Business News on Wednesday after the sharp decline.

In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.