Beijing, Aug 12 (IANS): The central parity rate of the Chinese currency renminbi (yuan), weakened by 1,008 basis points to 6.3306 against the US dollar on Wednesday, authorities said.

In China's spot foreign exchange market, the yuan is allowed to rise or fall by two percent from the central parity rate each trading day, reported Xinhua news agency.

The Bank of China, the central bank, improved the exchange rate formation system on August 11 to better reflect market development in the exchange rate of the Chinese yuan against the US dollar.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers and refers to the closing rate of the inter-bank foreign exchange market on the previous day, supply and demand and price movement of major currencies before the opening of the inter-bank market each business day.

The International Monetary Fund (IMF) described the central bank's move as "a welcome step" that allows market forces to have a greater role in determining the exchange rate.

"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said on Wednesday.

The IMF said it believes the country can achieve an effective floating exchange rate system within two or three years.

However, the move still surprised the market and prompted the lowest valuation of the yuan since October 2012.

Ma Jun, chief economist at the Bank of China's research bureau, attributed the lower rate to a long standing gap between the central parity rate and the previous day's closing rate on the inter-bank market.

The Bank of China said the rate changes are normal, as it shows a more market-based system and the decisive role that the supply-demand relationship plays in determining the exchange rate.

This may lead to potentially significant fluctuations in the short run but after a short period of adaptation the intra-day exchange rate movements and resulting central parity fluctuations will converge to a reasonably stable zone.

Official data showed the Chinese economy maintained seven percent growth in the first half of 2015 against challenges at home and abroad, creating sound conditions for the yuan to hold steady.

Surplus in goods trade reached $305.2 billion in the first seven months, a fundamental prop for the exchange rate.

The yuan and open financial sector have boosted the demand for the currency in recent years, which serves as momentum for the rate's stabilisation.

The Bank of China said it will strive to further improve market-based exchange rate formation, maintain normal fluctuations and keep the rate basically stable at an adaptive and equilibrium level.