Beijing is set to widen the yuan's trading band to make the pricing system for the currency more market-oriented.
The move reflects the resolve of policymakers to push ahead with financial reforms despite the shaky economic recovery and rising inflows of capital.
Yi Gang, deputy governor of the People's Bank of China (PBOC), said at an International Monetary Fund conference in Washington the widening of the trading band would come soon.
The PBOC controls the yuan's movement by setting a daily rate at which it starts trading. Last April it doubled the trading band to 1 per cent on either side of the bank's daily reference rate.
Economists expect the band will be widened to 1.5 to 2 per cent from as early as this quarter, giving traders greater leeway to push the yuan up or down.
Zhang Zhiwei, Chief China Economist at Nomura Securities, said: "This shows China will take bolder steps in financial reforms this year. The pace of exchange and interest rate deregulation will pick up."
The central government said last month it would hasten reform, and the retention of market-advocate Zhou Xiaochuan as governor of PBOC in March was widely seen as an endorsement of the push for change from the top leadership.
Yi said current market conditions made it "appropriate" to consider widening the band. His comment came despite GDP growth easing to 7.7 per cent and capital inflows rising through exports, foreign investment and "hot" money.
The yuan fell 0.15 per cent to 6.1813 yuan per US dollar in Shanghai yesterday. The fixing was cut 0.12 per cent to 6.2416, the biggest decline since August and forcing a weakening of the currency. The yuan has appreciated 0.8 per cent so far this year.
The US says China keeps the exchange rate of the yuan artificially low to help its exporters, but Beijing has rejected the claim.
Zhang said the widening of the band would not necessarily lead to a strengthening of the yuan, with growth expected to stutter and the property market set to stall due to curbs on buyers.
Industrial Bank economist Lu Zhengwei said the aim was to encourage two-way volatility and avoid the one-way bet on the yuan strengthening. He said PBOC officials believed the yuan had approached equilibrium after appreciating 34 per cent since the central bank scrapped a decade-old peg of 8.3 yuan per US dollar in July 2005.
"The broadening of the band should have come earlier," Lu said. "I hope it can be widened to 2.5 per cent to allow market forces to play a bigger role."
Additional reporting by Bloomberg