1st LD: Chinese yuan extends sharp fall Wednesday

Chinese currency continued to fall on Wednesday after the central bank reformed the exchange rate formation system to better reflect the market.

The central parity rate of renminbi, or yuan, weakened by 1,008 basis points to 6.3306 against the U.S. dollar, slightly narrowing from 1,136 basis points on Tuesday, according to the China Foreign Exchange Trading System.

The People's Bank of China (PBOC), the central bank, changed the exchange rate formation system so that it takes into consideration the closing rate of the inter-bank foreign exchange market on the previous day, the supply and demand in the market and price movement of major currencies.

The move surprised the market and prompted the lowest valuation of the yuan since October 2012.

Ma Jun, chief economist at the PBOC'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.

He said the shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation.

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 in an email on Wednesday.

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

The central parity rate is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day. The currency is allowed to trade on the spot market within 2 percent of the rate. Endi