The central bank has allowed the yuan to move in a relatively wide range after PBOC governor Zhou Xiaochuan said on Monday that conditions were now ripe for the yuan's exchange rate to float more widely.

Its mid-point dropped 0.41 percent from Monday to Thursday in its biggest four-day fall since August 2010.

The fall has sparked concerns of a yuan depreciation among some investors but traders said they did not expect the government to allow the yuan to depreciate this year. Many believe the government sets undisclosed targets for the yuan's exchange rate to help it manage the economy.

"The yuan became more volatile this week in line with the midpoint and PBOC's statement of a possible widening of the trading band," said a trader at a Chinese bank in Shanghai.

"While this trend is likely to continue in the future, we do not expect the yuan to depreciate this year."

Spot yuan closed at 6.3107 versus the dollar, stronger than Thursday's close of 6.3165.

Before trading began, the PBOC set the midpoint at 6.3073 compared with Thursday's 6.3235, the fixing's biggest single-day rise since late October last year.

TO WIDEN OR NOT?

China has been hoping for a long time to promote greater two-way flexibility in the tightly-controlled yuan, which has appreciated more than 30 percent since July 2005 when Beijing conducted a landmark revaluation of the currency.

But facing heavy pressure from the United States as China continues to posts large bilateral trade surpluses, the Chinese government often finds it difficult to let the yuan pull back significantly.

Speculation that the China will allow some pull back gained momentum late last year, when growth in China's exports began slowing due to the debt crisis in Europe, the biggest single destination for China's exports.

Traders say a wider trading band will be good for China at this time as its exports are now slowing, reducing the pressure on the yuan to appreciate.

But they add that there has been little real demand for widening the 0.5 percent official trading band, as the yuan generally moves less than 0.2 percent a day.

The PBOC should first encourage the yuan to move more widely both in intraday trading and against its midpoint before it embarks on broadening the official trading band, they said.

The central bank has kept the yuan stable within a tight range, in line with the government's policy to avoid any negative impact from a volatile exchange rate on the economy.

In the offshore non-deliverable forwards (NDF) market, the benchmark one-year NDFs implied yuan appreciation of 0.22 percent in afternoon trade, compared with 0.20 percent they implied at Thursday's close.