The China Foreign Exchange Trade System (CFETS) has said that the People's Bank of China has approved direct trading of the Singapore dollar against the Chinese yuan on the interbank market.

Analysts say that the move will help China to diversify its huge foreign exchange reserves, which is a pressing need for the country while Singapore will be able to build a yuan offshore centre on the island.

The Chinese currency is already traded directly against the US dollar, the euro, the Japanese yen, the British pound, the Aussie and New Zealand dollars, Russia's rouble and Malaysia's ringgit.

Other currencies trade via the US dollar, resulting in extra cost.

The CFETS will publish its yuan/Singapore dollar central parity rate at 9:15am each trading day. The exchange rate on the spot market will be allowed to trade 3% higher or lower from parity, according to a Xinhua report.

The PBoC said this is an important step in strengthening bilateral economic and trade relations between China and Singapore.

"China and Singapore will make further efforts to mutually promote the direct trading between the two currencies based on market principle," the central bank said in a press release.

Development of direct trading between the RMB and the SGD will contribute to the formation of direct exchange rate between the two currencies, helping reduce the cost of currency conversion, the bank said.

It will also facilitate the use of both the currencies in bilateral trade and investment and promote the financial cooperation and enhance economic and financial ties between China and Singapore, according to the PBoC.

The Singapore dollar weakened on Monday despite the broad decline in the greenback while the Chinese yuan continued to rise and traded at an eight-month high against the US unit.

The USD/CNY slipped to 6.1132, its lowest since early May, down from Friday's close of 6.1173. The USD/SGD edged higher to 1.2764 from 1.2754.