Stricter financial supervision needed before exchange rate flows freely

China's exchange rate system reform's aim is to eventally establish a free exchange system without government intervention, economists have said, while it is reasonable for the country to use short-term measures to stabilize the yuan's exchange rate given its immature financial market.

The most recent measure taken by China's currency authorities was to increase the number of currencies in the yuan's reference basket from 13 to 24 from the first day of this year. The central parity rate of the yuan against the dollar is set based on the average of this basket of currencies before the opening of the inter-bank market each trading day, and traders are allowed to trade 2 percent on either side of the reference rate.

The increase in the number of currencies in the basket will reduce the dollar's weight from 26.4 percent to 22.4 percent amid market speculations over the yuan's depreciation in the coming days. The change will be able to better reflect the fluctuation between the yuan and the other currencies used by China's major trading partners, according to China Foreign Exchange Trade System.