Banks can decide the "spread" -- the range between the buying and selling price -- for customers based on market demand, according to a central bank statement posted on the website of the State Administration of Foreign Exchange late Wednesday.
The announcement comes before key talks next week at the Strategic and Economic Dialogue between China and the United States, which is expected to push Beijing for greater economic reforms.
China keeps a tight grip on the yuan -- also known as the renminbi -- allowing it to move up or down two percent daily on either side of a mid-point set under the supervision of the central bank.
The latest announcement aims to "further improve the market-oriented yuan exchange rate formation mechanism", the People's Bank of China, the central bank, said in the statement.
Previously, the bank set specific limits on the bid-ask spread depending on the transaction type, state media said.
Analysts said the impact of the shift would be limited as it was aimed at retail customers, who make up a small proportion of foreign exchange trading, while corporate clients are already offered more market-based rates.
"This reform will not have any impact on renminbi exchange rates or the formation of mid-point prices," Liu Dongliang, a senior analyst with China Merchants Bank, said in a research note.
China has been promoting greater international use of the yuan and taking measures to make its exchange rate more flexible, although full convertibility of the currency remains far off, analysts say.
The PBoC in March doubled the daily trading band for the yuan against the dollar from one percent to two percent.
The government could further expand the daily trading limits between the yuan and other foreign currencies as part of future reforms, Liu said.