China set for currency flexibility

Beijing - The Chinese government is set to allow its currency, the renminbi or yuan, to fluctuate more widely against the dollar in the latest sign that the country is loosening its grip on the economy.

China's Central Bank said that beginning on Monday, the daily trading band would double to 2% on either side of a government-regulated parity rate, which could result in wider price fluctuations.

"The widening is within rational range and is a tentative step towards the liberalization of the yuan's exchange rate," said Yi Xianrong, a senior financial researcher at the Chinese Academy of Social Sciences.

The move is widely understood as an attempt to lower the serious risk of a downturn in China. Although its economy is growing at just below 7%, the rate of growth has fallen sharply over the last few years, and there are concerns that banks are masking liabilities.

The government has stepped up plans to liberalize interest rates and to reform the financial system.

It said last week that it planned to allow five private banks to lead pilot programmes allowing them to compete with state-run commercial banks.

Despite the moves towards liberalization, the Chinese government still has the power to set the daily parity rate, allowing it to prevent big swings in the value of the renminbi.