China needs to widen the yuan's trading band and introduce more currency derivatives to help firms hedge risk, a senior central bank official said in remarks published on Monday.

Chinese firms had increased their ability to cope with the yuan's greater flexibility since last July's landmark revaluation, Sun Gongsheng, head of the central bank's Nanjing branch, wrote in an article published in the Financial News.

Many firms had embraced nascent foreign exchange forwards and swaps to hedge currency risk and some firms had adjusted their dollar debt holdings to minimise potential losses, Sun said.

China revalued the yuan by 2.1 percent in July 2005 and changed its decade-old dollar peg to a managed float with reference to a basket of currencies.

The authorities needed to allow more currency derivatives, such as foreign exchange options, and to increase the variety of forwards and swaps, to help firms better hedge risk, Sun said.

"We should gradually increase the exchange rate's floating range in line with economic and financial conditions to help reduce the public's expectations about any imbalances in the exchange rate," Sun said.

Calls among economists to widen the yuan's tightly managed trading band, in order to help tackle excessive liquidity, have been rising in recent weeks.

The yuan is allowed to move 0.3 percent each day up or down against the U.S. dollar, although in practice it does not move nearly so far. So any widening of the band might be merely symbolic, at least initially.

Chinese officials have pledged to gradually increase the yuan's flexibility by making better use of its daily trading band rather than carrying out another one-off revaluation.

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