The State Administration of Foreign Exchange (SAFE) will also make it easier for banks to conduct forex derivative business and encourage lenders to better manage forex risks themselves, according to a notice on SAFE's website.
The announcement is designed to "further enhance the depth and breadth of China's forex market, and help market participants better manage currency risks," SAFE's deputy chief Wang Chunying said in a statement.
The yuan dropped roughly 4% against the dollar in April, a record monthly fall, and has fluctuated wildly this month.
Financial institutions in China, which currently can trade European-style currency options, will be allowed to trade American- and Asian-style ones too, so that they can better meet companies' diversified hedging needs, SAFE said.
Banks are also encouraged to use derivatives to hedge their forex exposure, and regulators will allow more banks to conduct forex derivatives business.
The forex regulator said it will continue to promote the "market neutral" mentality and the use of hedging tools, while discouraging one-way bets on the yuan.
Currency hedging activities using derivatives jumped 59% by volume in 2021 from a year earlier, SAFE said.
(Reporting by the Shanghai newsroom; editing by Jason Neely and Hugh Lawson)
