CNY EUR Direct trade

China's central bank said on 29th Sep 2014 the Chinese currency - CNY - can be traded directly against the euro in the interbank foreign exchange market, in the latest step to facilitate investment and bilateral trade between China and the European Union.

The move, which starts on Monday, will help to lower foreign exchange conversion costs while promoting the usage of both the Yuan (CNY) and euro in bilateral trade and investment, the People's Bank of China (PBOC) said in a statement on its website.

Trade between China and Europe in the first half of this year reached 291 billion U.S. dollars, up 12 percent year on year, according to the Ministry of Commerce. The China Foreign Exchange Trading System already offers yuan trade against the euro but only through the U.S. dollar as an intermediary.

The direct trade is a major development for the internationalization of the Chinese currency, said Ryan Song, head of markets for China at HSBC, one of the first batch of market makers.

The yuan has become the seventh biggest payment currency and the ninth biggest transaction currency in the world but it only accounts for 1.4 percent and 2.2 percent of the world's daily foreign exchange settlement and trading volume respectively, said Zhang Maorong, a researcher with the China Institutes of Contemporary International Relations.

"There is great potential for the internationalization of the Chinese currency," said Zhang.

The government keeps a tight grip on the capital account but is gradually relaxing its hold on the yuan, making it a global reserve currency.

China is under pressure to diversify its foreign exchange reserves--the world's largest -- which stood at nearly 4 trillion U.S. dollars at the end of June.

Currency swaps with foreign governments have increased overseas circulation of the yuan and in June direct trading began between the yuan and Britain's pound.

Direct onshore trade is allowed in a number of currencies, including the Japanese yen, Australian dollar, New Zealand dollar, Malaysian ringgit and Russian ruble.