BEIJING—China took a major step toward making the yuan a freer currency by further loosening its daily trading limits, indicating the leadership's belief that the country's economic growth, though slowing, is strong enough for exchange-rate reforms to move forward.

The People's Bank of China, China's central bank, sets a daily rate for the yuan against the U.S. dollar, which is called the parity rate. China until now had allowed investors to push the yuan's value 1% in either direction from that rate in daily trading. On Saturday, the central bank said it has decided to widen that trading band, allowing the currency to move up or down by 2% daily.

The band-widening announcement came as China's central bank in recent weeks has engineered a decline in the yuan's value to drive out speculators betting on the yuan's continued rise and to introduce greater two-way volatility into its trading, in a bid to pave the way for expanding the band. The PBOC has done so by guiding the parity rate lower and by instructing big state-owned Chinese banks to aggressively purchase dollars.

The yuan ended at 6.15 per dollar on Friday, down 1.6% since the beginning of this year. It has appreciated more than 30% against the dollar since the revaluation in 2005 when China dropped the yuan's decadelong peg to the greenback.

In comments posted on its website Saturday, the PBOC indicated that the yuan, also known as renminbi, is approaching its fair-market value and the central bank won't allow full flexibility of the yuan's trading anytime soon.