China's yuan tumbled to 5-1/2 year low versus the dollar on Monday as the central bank tolerated the Chinese currency's weakening after the Brexit by setting a sharply weaker midpoint and refraining from intervening in trading, traders said.

The People's Bank of China (PBOC) weakened the official midpoint the most since August 2015 when China shocked the global markets by allowing the yuan to weaken almost 2 per cent overnight.

State-owned banks, who often intervene in trading on behalf of the central bank to influence the yuan's value, did not conduct extraordinary dollar sales to support the yuan, traders said.

"The PBOC has become more accommodative of the yuan's two-way volatility of late,” said a dealer at a European bank in Shanghai.

"The sharp weakening of its midpoint today is in line with market expectations, while there is no evidence of unusual activity by the state banks today.”

PBOC Governor Zhou Xiaochuan had said on Friday that a more flexible yuan currency is important for China's development and reforms and monetary policy will be adjusted “in a dynamic way" to meet those goals.

Prior to market open, the PBOC set the midpoint rate at 6.6375 per dollar, 0.9 per cent weaker than the previous fix 6.5776.

Spot yuan opened at 6.6360 per dollar and was changing hands at 6.6464 at midday, softening 0.3 per cent from the previous close.

The yuan hovered near 6.65, beyond which some traders said that, based on their past experience, the central bank might stage a major intervention to arrest yuan's weakening trend.

"It is all getting very exciting - this greater fluctuation,” said a trader at a Chinese commercial bank in Shanghai.

"The market is testing the tolerance of the central bank, but also knowing that it won't let things get out of control.”

Others, however, expect the PBOC would tolerate the yuan to depreciate to 6.7 per dollar in coming months, given a broad weakening of non-dollar currencies after the Britain's vote to leave the European Union.

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