China will allow its currency to be directly traded against the British pound from Thursday, the central bank said, as the country keeps up efforts to boost the yuan's role in international finance and trading.
The direct conversion will lower transaction costs, facilitate the use of yuan and pounds in bilateral trade and investment, and strengthen the two countries' cooperation in the financial sector, the People's Bank of China (PBC) said in a statement posted on its website on Wednesday.
"This is a vital step for China and the UK to further push forward the development of their bilateral economic and trade relations," the PBC said.
The arrangement was the latest move that China made this year to internationalize its currency, as the growth of its economy continues to be dragged down by a cooling real estate industry and a sluggish manufacturing sector.
The change coincides with Premier Li Keqiang's three-day visit to the UK.
Li, who is China's top architect for economic restructuring and financial reform, was expected to heavily promote the yuan and deepen commercial ties with the European financial hub.
The move will also help London's bid to become an offshore yuan center.
China has allowed several currencies to directly trade with the yuan to lower transaction costs, including the US dollar, the Japanese yen, the Australian dollar and the New Zealand dollar.
The PBC is set to fix a daily central parity rate for yuan trading against the pound, based on the rates offered by China's major banks and brokerages, the China Foreign Exchange Trade System said in a separate statement on Wednesday.
HSBC China announced Wednesday that it has become the first batch of market makers for the direct exchange.
Lu Zhengwei, chief economist at the Industrial Bank Co, told the Global Times that the change works toward China's goal of making the yuan a special drawing rights currency, because it allows the yuan to be more convertible and thus more widely used in international trade.
"Since London is the top financial center in Europe, direct conversion with the pound will help the yuan gain recognition before it expands its presence in the area," Lu added.
Before Thursday, yuan had to be converted into US dollars, which could then be exchanged to pounds. Some market watchers have voiced concerns that the role of the US dollar may be reduced due to the change.
However, Liu Dongliang, a senior analyst at China Merchants Bank, told the Global Times that the direct conversion will have minimal impacts on the US currency.
"Chinese banks cannot and will not get rid of the US dollar, which is used as a parameter for the pricing of yuan against all other currencies," he said. "They still exchange the yuan into the US dollar before trading it against currencies that have been directly convertible to yuan for years."
The direct conversion carries great political significance as it will deepen ties between China and the UK and signaling the promising prospects of the yuan to the international financial community, Liu said.
Britain is China's third largest trading partner and the second largest investor among European countries. Sino-British bilateral trade reached $70 billion last year.
Several deals, which are aimed at promoting the yuan in the UK, were signed in the past two days.
TheCityUK, a private-sector financial services association, signed an agreement with the China Development Bank Corporation on Wednesday to support the lender's business in the UK and boost the yuan's presence in cross-border investments.
On Tuesday, Bank of China and the Agricultural Bank of China allied with the London Stock Exchange Group to promote offshore yuan trading in the UK.
According to UK Prime Minister David Cameron, deals worth more than 14 billion pounds ($23.7 billion) were signed on Tuesday.
China is also under pressure to diversify its foreign exchange reserves - the world's largest - which stood at $4 trillion at the end of May, the Xinhua News Agency reported.