The central bank has appointed Bank of China's Taipei branch to clear yuan transactions in Taiwan, in the latest step to strengthen economic ties between the mainland and the island.
The People's Bank of China signed a clearing agreement with the BOC branch yesterday, under which Taiwan residents would be allowed to deal in yuan-denominated assets such as deposits, loans and yuan investments.
Taiwan's central bank said in a statement that yuan businesses on the island would begin as early as the Lunar New Year.
Monetary authorities of the mainland and Taiwan signed a landmark pact on currency clearing on August 31 last year.
Under the pact, each side would name a clearing bank to handle direct conversions between the yuan and the Taiwan dollar.
Last year, Taipei appointed Bank of Taiwan's Shanghai branch as a clearing bank for Taiwan dollar transactions on the mainland.
The clearing agreement was seen as an initial step to acknowledge Taiwan's role in the drive to internationalise the yuan.
Establishment of the clearing banks enables residents on both sides to deposit and borrow money in each other's currency.
In Taiwan, there is speculation the island would get the status of a key offshore yuan centre.
An offshore yuan trading centre allows non-mainland companies, institutions and residents to trade the currency and settle trade deals before yuan becomes fully convertible.
On the island, an individual who sells or buys yuan will be subject to a 20,000 yuan daily cap, similar to the rules in other yuan offshore markets like Hong Kong.
Daily yuan remittance to other accounts is capped at 80,000 yuan for each Taiwan resident.
To encourage holding of yuan assets, Beijing has implemented a series of policies including the RQFII (renminbi qualified foreign institutional investor) scheme, which gave Hong Kong residents access to the mainland bond and equity markets.
"A closer economic relationship between the mainland and Taiwan can be expected after the currency deal," said Ray Lu, an investment manager at Hotung Ventures. "Taiwanese businesses are still actively hoping more pacts of this kind could help them conduct more cross-strait deals."
In December, Fubon Financial Holding, the second-largest publicly traded financial group in Taiwan, announced it would buy a majority stake in First Sino Bank, the largest acquisition of a mainland business by a Taiwanese investor.
The deal, valued at US$1 billion, reflected Taiwanese businesses' growing interest in tapping the vast mainland market.
According to Bloomberg, the total value of announced acquisition deals between the mainland and Taiwan hit a record high last year, reaching US$2.2 billion.