The yuan will be able to trade as much as 2% on either side of a daily central bank reference rate, compared with the current 1%, the People’s Bank of China said in a statement published on Saturday.
The band was last widened in April 2012 from 0.5%, and before that from 0.3% in May 2007.
The move underscores pledges from the government to make the exchange rate more market-based and promote freer movement of capital in and out of the country for investment.
The People’s Bank of China in February included an "orderly" broadening of the yuan’s band among its 2014 policy goals, and it said in November that it planned to end "basic" intervention in the currency market.
"Introducing more flexibility in the exchange rate is an essential step to globalising the yuan," said Nathan Chow, a Hong Kong-based economist at DBS Group.
A third of China’s trade will be settled in yuan by 2015 and the currency will be fully convertible within five years, HSBC forecast in a report last year.
The yuan has dropped 1.8% from a 20-year high of 6.0406 per dollar reached on Jan 14, after strengthening 2.9% in 2013. It closed at 6.1502 on Friday.
The yuan’s drop was largely guided by the government to tame expectations of appreciation and counter hot-money inflows as it prepared for the band widening, Mr Chow said.