The International Monetary Fund has welcomed a decision by China's central bank to widen the yuan's trading band against the dollar in a major step towards loosening currency controls.

The yuan is currently allowed to trade 0.5% on either side of a midpoint price set by the central bank every trading day.

The new rules - seen as a shift towards adopting more market-oriented reforms - will come into effect on Monday and allow the currency to fluctuate by up to 1% either side, the bank said in a statement.

IMF chief Christine Lagarde described the move as an "important step".

"This underlines China's commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate," Ms Lagarde said in a statement.

Beijing's trading partners have long criticised its yuan exchange rate, saying it is kept artificially low, fuelling a flow of cheap exports that have helped trigger huge trade deficits between some countries and China.

However, that pressure has eased since data this year showed China's trade balance with the rest of the world has shifted, ending a long period of huge trade surpluses based on low-cost labour and a cheap yuan.

China has repeatedly vowed to loosen its grip on the yuan as it moves towards full convertibility but has rejected calls for a faster appreciation for fear of hurting its manufacturing sector, a key driver of its economy.

Today's announcement means that the yuan will be allowed to fluctuate further against the dollar but not necessarily appreciate as much as China's trading partners, including the United States, might like.

The announcement came after China said yesterday that its economy grew at its slowest pace in nearly three years in the first three months of 2012, expanding by 8.1%.

However, analysts predicted the world's second-largest economy would avoid a hard landing, which could trigger massive job losses and spark social unrest.

The central bank called in February for the government to move faster to loosen currency controls to make it easier for Chinese companies to invest overseas and boost the yuan's global status.

China restricts the movement of money outside the country such as investment in real estate, stocks and bonds to prevent sudden inflows and outflows of capital that could destabilise its financial system.

Beijing has vowed to increase the use of the yuan in international trade and encourage foreign investment in Shanghai's financial markets, according to a five-year blueprint unveiled this year by the National Development and Reform Commission, a powerful state planner.

However in its study released in February, the central bank said reforms were taking too long and China could loosen investment controls and encourage more enterprises to take opportunities abroad in the next three years.