Growing trade between China, the world's second largest economy, and Malaysia will encourage more yuan-denominated fundraising through the issuance of conventional and Islamic bonds, Malaysia's central bank chief said Thursday.

China has become Malaysia's largest trading partner in recent years, importing products that range from palm oil to rubber tires.

"The progress made thus far, while modest, has significant potential given the significant volume of the bilateral trade and foreign direct investment between our economies," Zeti Akhtar Aziz, governor of Malaysia's central bank, said at a seminar on yuan settlements.

Zeti said Malaysia is well-positioned to capitalize on the growing popularity of fundraising in yuan, given the Southeast Asian country's market size and infrastructure.

"(With) China's greater prominence in the global economy, a dynamic response is required in this new operating environment," Zeti said.

"One of the changes that will shape the international financial system in the years to come is the wider role of the yuan in trade and finance," she noted.

The volume of yuan transactions is expected to grow as traders operating in China would be able to eliminate hedging and conversion costs by transacting in the local currency, she said.

In 2011 alone, China accounted for 14 percent of Malaysia's total trade.