Malaysia too has said it was unpegging the country's currency from the US dollar and replacing it with a managed float, making the announcement immediately after the Chinese move.
China, in its long-awaited move on Thursday, said it would improve the running of the economy and give more play to market forces, the central bank said the yuan's value from now on would be linked to a basket of currencies of China's main trading partners.
Beijing had been under strong pressure from its trading partners, especially the United States, to abandon the yuan's peg of 8.28 per dollar, which they said undervalued the currency and handed Chinese exporters an unfair advantage on world markets.
The new rate, initially, will be 8.11 yuan per dollar, well short of the 10% revaluation that Washington had been seeking to head off protectionist pressure in Congress.
"It was going to happen at some point. They have introduced a very modest appreciation to kick the whole thing off," said Ian Gunner, head of foreign exchange research at Mellon Financial Corp. in London.
From now on, the yuan, also known as the renminbi (RMB), will be allowed to move in a tight range of 0.3% up or down from the previous day's close, the central bank said, leaving open the possibility of further incremental revaluations.
"The RMB exchange rate will be more flexible based on market conditions with reference to a basket of currencies"
People's Bank of China
"The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation," the central bank said in a statement in English on its website.
"The RMB exchange rate will be more flexible based on market conditions with reference to a basket of currencies," it added.
In Kuala Lumpur, Malaysia on Thursday said it was unpegging the country's currency from the US dollar and replacing it with a managed float, making the announcement immediately after a similar move by China.
The central bank, Bank Negara, said in a statement that the ringgit, which had been fixed at 3.8 to the dollar since 1998, will be allowed "to operate in a managed float" with immediate affect.
Its value will be determined by economic fundamentals, the bank statement said.