China's decision to expand the yuan trading band may indicate the country's economic slowdown will be gradual rather than abrupt, an economist says.
The yuan can now move up to 1% against the US dollar from a so-called daily fixing rate, the first time China's central bank has widened the band since 2007. The previous limit was 0.5%.
The pace of economic expansion slowed to 8.1% in the first three months of the year and there are concerns about China's cooling property market and weaker exports as some European countries cut spending.
The head of investment strategy and chief economist at AMP in Sydney, Shane Oliver, says a more flexible yuan indicates Chinese authorities are confident the economy is more resilient that it may have been in the past.
He says the yuan remains slightly undervalued against the US dollar. China is running a trade surplus, has a stronger growth potential than the United States and does not have a debt problem.
"All of those things suggest the Chinese currency will over time continue to rise but I think its rate of ascent will be far more modest than the 30 percent gain we've seen since 2005."
Mr Oliver says the exchange rate move signals a greater degree of confidence by the Chinese authorities that they can manage the economy without having to rely too much on managing the exchange rate.
He says China's move also further blunts the US's arguments that Beijing is deliberately holding down the value of its currency and giving Chinese exporters an unfair advantage.
The new currency rules follow increases in quotas for foreigners buying stocks and bonds in China and in the amount of yuan held offshore that can be invested locally.
A five-year plan running through 2015 calls for officials to keep loosening controls on capital flows as the nation moves towards a convertible currency.
