Analysts believe the central bank's policy will allow market forces more sway in exchange rate determination and help China to send the RMB into the benchmark currency basket of the International Monetary Fund (IMF).
"Today's move is likely intended to improve the 'market-driven ' quality of the PBOC daily fix, so that it can qualify to be used by the IMF as a Special Drawing Rights (SDR) reference rate," said Wang Tao, chief China Economist at UBS.
Wang expects the USD-CNY exchange rate to be around 6.5 by the end of 2015, up from his previous forecast of 6.3.
NOT EXPORT STIMULUS
Analysts have dismissed the idea that the central bank's move is China purposely adopting a currency devaluation strategy to counter a slump in exports.
Official data showed Saturday that exports fell to 7.75 trillion yuan (1.24 trillion U.S. dollars) in the first seven months of this year, down 0.9 percent from a year ago. In July, exports declined by 8.9 percent.
"Exports have indeed been soft this year, but this is largely a reflection of sluggish external demand," the HSBC said in a research note.
"In an environment of a soft global recovery, the benefits of beggar-thy-neighbor competitive devaluation are neither clear nor easy to reap."
The HSBC believes Chinese policy makers have sufficient policy ammunition to boost domestic demand to offset external headwinds.
"Both monetary and fiscal policies are becoming more accommodative and better coordinated, as evidenced by the reports that policy banks will issue more than 1 trillion yuan of financial bonds to support infrastructure investment."
The HSBC forecast an additional 25 basis points (bps) interest rate cut and 200 bps reserve ratio cut in the second half of this year.
"The combination of monetary and fiscal policy support should help ensure that the economy on a path of cyclical recovery and achieve the growth target of around 7 percent." it added.
