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.
China doubles yuan trading range against the US dollar to 2 per cent
Currency will be allowed to move 2pc up or down in further liberalisation move
China's central bank has decided to double the daily trading band for the yuan against the US dollar from tomorrow, marking a step forward in giving the currency more flexibility.
The People's Bank of China will allow the exchange rate to float by as much as 2 per cent up or down from a midpoint set by the central bank each day. The band has been kept at 1 per cent since 2012.
The central bank, however, vowed to step in as needed to stem any large swings.
Market players have widely expected the change after the central bank guided the yuan to weaken 1.6 per cent against the US dollar since the start of this year, reversing a 2.9 per cent climb in 2013.
"It's another step made by Beijing towards a free-floating currency, which may eventually take place in one or two more years," said Shen Jianguang , Mizuho Securities' Greater China chief economist.
"While the yuan can float in a wider range, it remains not convertible at the moment as the central bank has retained capital control," Shen told the Sunday Morning Post.
He forecast the yuan might weaken further over the next three months before rebounding as domestic economic growth stabilises. The rate of exchange to the US dollar would likely fluctuate between 6 yuan and 6.25 yuan this year, he said.
Beijing has pledged to further liberalise mainland financial markets by permitting more risk. Central bank governor Zhou Xiaochuan said this month the government would fully relax its control over interest rates within one to two years.
The yuan's continued appreciation last year attracted rapid foreign capital inflows. But slowing economic growth has added downside pressure on the yuan, some analysts say. In the first two months of the year, growth in industrial output, investment, exports and retail sales showed further weakness.
The central bank said the yuan was unlikely to rise or fall dramatically, and urged people to focus more on the mid- to long-term trend.