China will use the yuan in transactions with neighbouring economies on a trial basis, state media said Thursday, calling it a potential first step to making it an international currency.
The government will allow the yuan to be used in settlements between the Pearl and Yangtze river delta regions -- both major industrial areas -- and Hong Kong and Macau, the China Daily reported.
Similarly, southwest China's Yunnan province and Guangxi Zhuang region in the south will be permitted to use the yuan in settling trade with members of the Association of Southeast Asian Nations.
The initiative emerged from a meeting Wednesday of the State Council, or cabinet, but no details were available on when it would be implemented, according to the paper.
"The move will... increase the yuan's acceptance in Asia, which will help it become an international currency in the long run," Zhao Xijun, a finance professor at the People's University in Beijing, told the paper.
The vast majority of China's foreign trade deals are currently settled either in euros or US dollars.
In 2007, China's trade with Hong Kong, Macau and the 10 ASEAN nations equalled nearly 403 billion dollars, about 20 percent of the country's overall foreign trade, the paper said.
"The yuan settlement trial between China and neighbouring regions and countries is an important step for China towards internationalising its currency," said Lu Zhengwei, a Shanghai-based economist with Industrial Bank.
"But it’s still in the infancy stage, and China will need to take other measures to facilitate its development such as maintaining a stable exchange rate between the dollar and the yuan," he told AFP.
Central bank governor Zhou Xiaochuan warned earlier this month that settlements using the US dollar would be problematic if the dollar's value fluctuated drastically.
There has been growing pressure over the past year within China to make the yuan an international currency, but the government has so far been cautious as it would require making it fully convertible, the paper said.
The yuan is not yet convertible on the capital account, meaning funds cannot freely enter the country for purposes such as investment in stock or real estate.
The Chinese government is concerned that liberalising this type of fund flow would make the economy more vulnerable during times of regional or global turmoil.