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The Singapore dollar (SGD) has been approved to trade directly with the Chinese yuan on the international bank market by the People's Bank of China (PBoC), according to the China Foreign Exchange Trade System (CFETS).
According to analysts, the recent maneuver will improve China's massive foreign exchange reserves' diversity, which the country urgently needs. Meanwhile, Singapore will now have the capability to set up an offshore center for the Chinese yuan.
Among the Chinese yuan's direct trade counterparts include the ruro, the British pound, the Japanese yen, the Russian rouble, Malaysian ringgit, the U.S. dollar, and the Australian and New Zealand dollars. Other remaining international currencies have to trade first via the U.S. dollar, a trading step that adds a middle cost.
The Chinese yuan/Singapore dollar central parity rate will be published by the CFETS at 9:15 a.m. every trading day. Spot market exchange rates will be granted to trade higher or lower from the parity rate by 3 percent.
The People's Bank of China said that the approval is a significant step towards bolstering the China-Singapore bilateral trade ties.
"China and Singapore will make further efforts to mutually promote the direct trading between the two currencies based on market principle," a press release from the central bank stated.
The yuan-Singapore dollar's progress in direct trading will lead to the establishment of a direct trading rate between both currencies, which will result in reduced costs for converting the currency, said the PBoC.
The central bank added that the trading will also help push the utilization of the two currencies in investments, will encourage financial cooperation and will improve the economic relations between China and Singapore.
