The move caused the currency to immediately fall in value, and to continue to fall on Wednesday.
From 11 August, the daily central parity quotes on the China Foreign Exchange Trade System before the market opens will be based on three measures: the closing rate of the inter-bank foreign exchange rate market of the previous day; supply and demand in the market; and the price movements of major currencies, Xinhua said.
The People's Bank of China (PBOC), China's central bank, said the policy change was due to a strong US dollar, and appreciation in the RMB real effective exchange rate, Xinhua said.
The RMB has deviated from its actual market rate "by a large extent and for a long duration", undermining "the authority and the benchmark status" of the central parity system, the PBOC said, Xinhua reported.
The PCOB described the fall in the value of the RMB as a "one-off" adjustment, Xinhua said. The central bank will monitor the market to make sure the new system is working, it said, and will work to make it more "market-oriented", Xinhua said.
The move will reduce the cost of Chinese-manufactured goods exported to many other countries, said Shanghai-based Yan Geng of Pinsent Masons, the law firm behind Out-Law.com.
"Yuan weakness, while potentially aiding exporters and outbound investments, also carries risks, including huge foreign exchange losses of Chinese companies, potentially destabilizing the fragile banking system," she said. "I think that the PBOC will not tolerate a sharp RMB depreciation and may increase intervention to prevent this. It remains the country's policy to keep the exchange rate of RMB stable at the appropriate equilibrium level."