Paradoxical as it may sound, China's move to give the yuan more wiggle room is a sign of caution and deepening concern about the slowing economy rather than a promise of Beijing's vigorous pursuit of market reforms, government economists say.
The move itself was no big surprise, although by doubling the currency's trading band the central bank went a bit further than many had expected and acted a bit sooner than some thought.
(Read more: China's yuan takes first big swing in wider band)
Yet many took that as a reassurance the broad financial liberalization promised at a key leadership gathering last year was on track, including the expected removal of controls on deposit rates.
However, government economists and policy advisers involved in internal policy discussions told Reuters that of all the possible policy steps, the central bank chose one considered least risky and which also offered it a way to hedge against further economic slowdown.
After a string of weak economic data casting doubt on Beijing's 7.5 percent growth target for this year and signs of financial strains in some industries and the financial sector, Beijing is now less willing to accept the short-term pain.
"The band widening was an easier step. Removing the ceiling on bank deposit rates needs more preparations and it's unlikely to happen this year," said a senior economist at the Chinese Academy of Social Sciences (CASS), a top government think-tank.
"It could be at the last of the reform sequence, as the economy faces relatively big downward pressures," said the economist, who requested anonymity due to the sensitivity of the issue.
On Wednesday, Premier Li Keqiang indicated officials were looking to support the economy, including by speeding up investment and construction.
(Read more: Yuan's fall may leave some exposed to heavy losses)
"We need to seize the time to implement measures that we have determined in expanding domestic demand and stabilizing economic growth," he told a cabinet meeting, official media reported.
Central bank chief Zhou Xiaochuan said last week that deposit rates are likely to liberalized in one to two years - the most explicit timeframe to date, and warned that deposit rates could climb as a result of liberalization.
The insiders told Reuters the People's Bank of China (PBOC) chose to go ahead with the trading band widening because it is increasingly wary of the impact from thornier changes, such as freeing up bank deposit rates and loosening capital controls.
"The biggest problem is in the financial system. Monopolies create rent-seeking and high borrowing costs despite ample money supply," said Wang Tianlong, an economist at think-tank China Centre for International Economic Exchanges (CCIEE).
Unlike other reforms, letting the yuan move more freely could offer an immediate boon, given markets have turned bearish and the currency now looks more likely to test the band's bottom rather than upper limits.
A weaker yuan would offer some relief to struggling exporters even though, at least in theory, greater currency volatility would work to cancel out those benefits.
Both currency traders and government economists point out, however, that the central bank still has the means to restrain the yuan and steer it lower while avoiding sharp swings.
Haibin Zhu, China economist at JPMorgan in Hong Kong, said the timing of the PBOC announcements just days after poor economic data raised suspicions that the step was mainly designed as a stimulus measure.
"This could be triggered by the weaker-than-expected economic data in Jan-February The weak economic data raised the pressure for PBOC to ease its monetary policy," he said in a research note.
(Read more: The yuan trading band has been widened- Now what?)
The yuan's losses against the dollar are approaching 3 percent this year, and it hit a one-year low on Thursday.
"The yuan has been depreciating and there is no risk of big appreciation," said a former central bank researcher who is now a senior economist at a top government think-tank in Beijing.
"On the contrary, it will be a good thing if we see some depreciation, that's precisely what we want."
Think-tank sources say the PBOC is prepared to take its strongest action since 2012 to loosen monetary policy if economic growth slows further, by cutting the amount of cash that banks must keep as reserves.
China's sporadic cash crunches since last year, along with risks in the shadow banking sector, have put the PBOC on defensive and could hinder the reform agenda.
A deposit insurance scheme designed to protect savers against bank failures, which many had expected to be launched at the turn of the year, may still get unveiled before the middle of 2014, economists say, but the follow-up will be slow.
Other preparations include an expansion of the interbank market for certificates of deposits (CDs).
Top banking regulator Shang Fulin said last week China would launch pilot programs in four provinces to test the development of privately-owned banks.
The PBOC hopes that higher money rates would ultimately force banks to cut their risky lending, but demand for loans and other forms of financing from the state-owned firms and local governments that suck up the bulk of funding remains strong.