China to allow direct yuan, New Zealand dollar trades

China has allowed direct domestic trading of the yuan against the New Zealand dollar to encourage such trading as it internationalizes the Chinese currency.

The move, announced on Tuesday by the central bank during a visit by New Zealand Prime Minister John Key to Beijing, comes after China doubled the yuan's trading band over the weekend in a milestone step that gives investors more freedom to set the value of the tightly controlled currency.

(Read more: Will China's slowdown benefit the rest of the world?)

Getty Images

China is New Zealand's largest export destination and a major buyer of dairy products produced in the South Pacific nation. The move was seen as promoting trade between the two countries, which rose 25.2 percent to NZ$18.2 billion ($15.71 billion) in 2013, and increase capital flows.

"Today's announcement will further reduce the costs of trade and investment transactions between New Zealand and China, increasing the ease of doing business for the benefit of business people in both countries," New Zealand Prime Minister John Key said in a statement.

As part of China's sweeping plans to overhaul its maturing economy and let market forces drive a host of industries, the government wants to gradually relax its hold over the yuan and turn it into a global reserve currency that one day rivals the dollar.

(Read more: What that China debt default means to the market)

The government's wish to promote international use of the yuan is partly driven by its concern that China is too vulnerable to the fluctuating value of the dollar.

China is home to the world's largest foreign exchange reserves, worth $3.82 trillion at the end of last year. About a third is invested in U.S. government bonds.

China is 'elephant in the room' for markets: Pro
China is 'elephant in the room' for markets: Pro

To promote international use of the yuan, China has signed a series of currency swaps with foreign governments in order to increase the overseas circulation of the Chinese currency.

Beijing has also allowed foreign exchange traders to directly trade a string of currency pairs within China to lower transaction costs. The New Zealand dollar is the 10th foreign currency that can be directly traded against the yuan in China.

And some data suggests China is making headway in its efforts to raise the yuan's profile.

(Read more: China central bank ready to act if growth falters)

Global transaction services organisation SWIFT said in December that the yuan overtook the euro in October to become the second-most used currency in trade finance.

But despite rising use of the yuan overseas and the apparent greater freedom that investors have in trading it, China's central bank still keeps the currency on a tight leash with traders reporting regular central bank intervention in the market.