China is under pressure from the US to allow the yuan to strengthen

It comes ahead of next week's economic summit between China and the US.

The central bank says that the widening of the band does not necessarily mean that the currency will appreciate as significantly as Washington would like.

China has also increased interest rates and the amount of cash that banks have to keep in reserve.

Widening the trading bands may not be as important a step as it appears, because the bands determine how far the currency may fluctuate from the parity rate, which is set each day by the central bank.

Also, the yuan rarely approaches its current trading limit of 0.3%.

"That is strong evidence that the People's Bank of China is intervening heavily to stop the currency from appreciating," according to Mark Williams, International Economist at Capital Economics.

He describes the widening of the band as "a costless concession from the Chinese side" ahead of next week's summit.

Interest rate rise

The one-year lending rate is going up by 0.18 percentage points to 3.06%, while the one-year deposit rate is rising by 0.27 percentage points to 6.57%.

It is the fourth time that the People's Bank of China has raised interest rates in a little over a year in its attempts to rein in economic growth.

Raising reserve requirements is also supposed to slow the economy.

Banks' reserve requirements have gone up eight times in the last year - this time they have gone up half a percentage point to 11.5%.