China's Central Bank Engineered Yuan's Decline PBOC Prepares for a Wider Currency Trading Range BEIJING—China's central bank engineered the recent decline in the country's currency to shake out speculators as it prepares to allow a wider trading range for the tightly tethered yuan, according to people familiar with the central bank's thinking. In the past week, the People's Bank of China has been guiding the yuan lower against the dollar. It has done so by setting a weaker benchmark against which the yuan can trade. It has also intervened in the currency market by directing state-owned Chinese banks to buy dollars, according to traders. The moves brought the yuan, also known as the renminbi, to its weakest level in seven months and represents a reversal of the practice for most of last year when the central bank kept pushing the yuan higher against the dollar, even as the currencies in other emerging countries tumbled. Money has been pouring into China—sometimes, analysts have said, by circumventing currency controls—to take advantage of the seemingly unstoppable rise. By guiding the yuan weaker, the PBOC intends to thwart short-term speculators betting on a continued rise and to introduce greater two-way volatility into its trading. "The PBOC is testing the market as it prepares to widen the yuan's trading band," said one of the people familiar with the bank's thinking. While a short-term move, making the yuan behave more like a market-driven currency fits into a broader plan to restructure the economy so that it is less dependent on investment and exports. Though increasingly important in international trade, the yuan isn't freely convertible. The central bank sets the value, permitting the yuan to fluctuate within a controlled range against the dollar. Currently, the PBOC allows investors to push the yuan's value 1% in either direction from that set rate in daily trading. Many analysts and economists expect the central bank to expand that range this year by allowing the currency to move up or down by 2% daily. The last time the band was widened was in April 2012, when it was increased to 1% from 0.5%. Surging inflows of capital have been complicating Beijing's efforts to manage the economy, contributing to soaring property prices and injecting excess cash into the financial system. China's central bank and commercial banks purchased nearly $45 billion worth of foreign exchange in December, the fifth consecutive month of net purchases. A weaker yuan could also help exporters, whose goods would be cheaper in the U.S. and other foreign markets. The PBOC decided to tamp down expectations for one-way appreciation in the yuan and curb speculative trading during two-day currency-policy meeting that ended on Feb. 18, the people said. At the meeting, a deputy governor, Hu Xiaolian, called for greater efforts to prevent risks from cross-border capital flows and joined other officials in expressing concern about "hot money" inflows, according to a PBOC statement issued after the meeting. At the meeting, the PBOC also decided to expand the yuan's trading band this year in an "orderly" manner, the central bank statement said, as it moves toward making the yuan a freer currency. On Feb. 19, the day after the meeting, the yuan started its recent slide, falling to the lowest level in almost two months. The yuan ended at 6.1248 per dollar on Wednesday in mainland trading, barely changed from the closing of 6.1266 the previous day. The currency has fallen 1.2% against the dollar since the beginning of this year, a dramatic move for a currency that often barely budges and that gained 2.9% in 2013. The slide added to jitters among investors already anxious about a slowing Chinese economy and touched off concerns about a selloff of yuan in offshore markets. Chinese officials sought to calm nerves Wednesday. "The movement in renminbi is due to an adjustment of trading strategy by main market participants," China's foreign-exchange regulator said in the government's first comments, published on the regulator's website. "The yuan fluctuations are normal compared to volatility in developed and emerging market currencies," the regulator said. "Don't read too much into them." Following the comments, the yuan reversed course and strengthened slightly. PBOC officials have said in the past that the yuan is nearing its fair-market value, or "equilibrium level," meaning the chances of any drastic movements in the currency are limited. By making the currency more of a two-way bet, PBOC officials hope to relieve the pressure for it to rise and ease the way to widen the trading band, according to the people with knowledge of the PBOC's thinking. Widening the trading range won't eliminate the PBOC's grip on the currency, because the central bank will still maintain the daily reference rate for the yuan. Nonetheless, the potential change would be an important step toward establishing a market-based exchange-rate system, in which the yuan would move up and down just like any other major currency. The exchange-rate reform is part of China's plan to overhaul its financial sector, elevate the country's status in the international monetary system and someday, according to some Chinese officials, rival the U.S. dollar as the de facto global currency. A freer yuan may also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan, allowing it to rise in value and boost Chinese consumer demand. China has long resisted calls for a free float, preferring a gradual approach out of concern that drastic measures would destabilize its capital markets or hurt the country's powerful export market. A move to widen the yuan's trading range would come as China's juggernaut economic machine is slowing down, leading to questions of whether leaders might try to stimulate growth and help struggling companies. The yuan "has appreciated all these years and probably won't go too much higher from now on," said Du Hanbing, who runs a business in the southern city of Shenzhen that makes embossing machines and sells them in the U.S. and Canada. "I'm more concerned about foreign demand and my customers' ability to pay me these days." Some investors seem undeterred by the weaker yuan. Among them is Andy Seaman, a portfolio manager at London-based investment firm Stratton Street, who said he has been increasing exposure to the yuan. Mr. Seaman said the yuan will continue to appreciate "for many years to come," pointing to the rising demand for it in cross-border trade settlement. His yuan-bond fund is up 1.79% this year in dollar terms, Mr. Seaman said.