The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Wider yuan trading band on the cards
After months of yuan stability, Beijing has a chance to expand the limits within which the mainland currency is allowed to trade
Smaller swings in the yuan, this year's best-performing emerging-markets currency, are providing scope for the mainland to widen the trading band for the first time since April 2012.
The yuan's one-month implied volatility fell to 1.15 per cent on August 13, the lowest level since October 4 and the most stable of 23 emerging-market currencies after the pegged Hong Kong dollar, according to data.
Analysts have cut appreciation forecasts for the yuan as growth in the world's second-largest economy slows.
The currency will end the year at 6.12 per US dollar, the median estimate in a survey shows, weaker than the 6.10 projected on June 30 and the 19-year high of 6.1121 reached on Thursday in Shanghai.
"It's definitely a good time now or before September to get a wider trading band," said Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong. "Lesser bets on yuan gains and low volatility are instrumental as that means there won't be too much one-sided speculation even if you have a broader range."
Expanding the yuan's trading range would lend weight to China's pledge to pursue a more flexible exchange rate as policymakers shift the economy away from exports to focus more on household demand.
The People's Bank of China widened the band to 1 per cent from 0.5 per cent last year, at a time when mounting concerns over the debt crisis in Europe, China's biggest trading partner, dampened speculation for yuan gains.
The yuan has climbed 1.9 per cent against the US dollar this year, more than twice the appreciation of the next-best performing developing-nation currency, Bulgaria's lev.
The People's Bank of China sets a daily reference rate for the yuan against the US dollar in Shanghai that limits the currency movement to a maximum 1 per cent on either side.
The limit is 3 per cent for fixings versus the euro, the British pound, the yen and the Hong Kong dollar, while there is a 5 per cent cap against the Malaysian ringgit and the Russian rouble.
The currency has touched both ends of its current trading range versus the US dollar. It fell to a 0.99 per cent discount to the official fixing on July 20, 2012, testing the weak end for the first time.
The yuan traded within 0.1 per cent of the upper end of the band on most days between October and May, reaching the limit often during the period. The spot rate has been at an average 0.7 per cent premium to the reference rate since May.
China will improve the yuan's exchange-rate regime by letting market forces play a larger role and increasing the currency's two-way volatility, the PBOC said in a quarterly report released on August 2. The central bank also said it would keep the currency basically stable at a reasonable level.
Appetite for yuan assets is cooling as China targets economic growth of 7.5 per cent, marking the slowest pace in more than two decades.
Yuan positions at Chinese financial institutions accumulated from sales of foreign exchange, a measure of capital flows, declined 41.2 billion yuan (HK$51.83 billion) in June, the first drop in seven months, central bank data shows.
Speculation that the Federal Reserve will scale back its monthly US$85 billion bond-buying is also driving funds away from emerging markets, including China. The nation's capital and financial account showed a US$1.6 billion deficit for the second quarter.