CHINA’S central bank has clarified operational details for conducting cross-border business in the yuan currency through its pilot project in the Shanghai free trade zone (FTZ), according to a circular seen Friday.

    The circular to the banks was released by the Shanghai head office of the People’s Bank of China and marked a significant step in China’s goal to internationalize the use of the yuan, a move that could rival the U.S. dollar as the preferred currency in global business transactions.

    China launched the Shanghai free trade zone in late September and officials promised a far more open and streamlined environment for foreign firms to do business there, along with the relaxation of policies for a raft of service sectors.

    It forms part of a broader drive to help expand the Chinese currency’s footprint beyond Hong Kong, where more than 80 percent of yuan trade settlement transactions are handled and foster greater confidence among offshore businesses to adopt the yuan, also known as the renminbi, as a currency for trade.

    China’s efforts have paid dividends, with the yuan already overtaking the euro to become the second-most used currency in trade finance, data from global transaction services organization SWIFT showed.

    According to the circular, banks in Shanghai are allowed to do cross-border renminbi settlement under the current account and for direct investment on the basis of “know your client,” “know your business” and “due diligence.”

    This means that banks can decide whether to arrange such transactions for their clients independently, without having to seek regulators’ approval.

    The notice also unveiled formulas to calculate how much firms and financial institutions in the zone can borrow in yuan from offshore markets and where the funds can be used.

    In terms of cross-border, two-way yuan pooling and sweeping, members within a corporate group are allowed to do non-quota based transactions without the central bank’s sign-off. (SD-Agencies)