Beijing's move to widen the yuan's trading band may be followed by more policy changes as the country grapples with trying to maintain stable capital inflows and economic growth.
Economists say the central government may have to further ease the economic policy to support growth while trying to rely less on the US dollar in its exchange rate regime following the expansion of the yuan's trading band, which came into effect yesterday.
The yuan is now allowed to trade within a 1 per cent band on either side of a mid-point price set daily by the central bank, from 0.5 per cent previously.
The move may herald more volatility in the onshore currency market as economists believe the days of one-way yuan appreciation are numbered.
'Outflows are not necessarily bad,' said Joy Yang, the chief economist for greater China at Mirae Asset Securities. 'A more pressing question for the government is how to attract more sustainable and healthy capital inflows to offset the loss of speculative and volatile inflows that will now ebb with perceptions of limited upside for the yuan.'
Many economists, including those at JP Morgan and Societe Generale, maintain their forecasts that the yuan will still rise 2 to 3 per cent this year. The currency has gained about 30 per cent against the dollar since it was revalued in 2005.
'The role of the dollar as the dominant currency in the current exchange rate regime is likely to decline gradually. Going forward, we believe the central bank may make greater reference to a basket of currencies,' said JP Morgan's chief China economist Zhu Haibin.