HONG KONG - China and Hong Kong signed a deal Monday allowing cross-border trade to be settled in yuan, a move seen as a step towards the greater convertibility of the Chinese currency.

Joseph Yam, chief executive of the Hong Kong Monetary Authority, signed the much-anticipated deal with Zhou Xiaochuan, governor of the People's Bank of China in Hong Kong.

"As the progress of development in China quickens, people have a lot of expectations for our currency, and Hong Kong as an international financial centre is a very good place to trial it," Zhou told reporters.

The move was first announced in December, and Beijing said then that a similar deal could follow with the 10 countries of the Association of Southeast Asian Nations (ASEAN).

It is seen by analysts as an early step towards the full convertibility of the yuan, which is the stated goal of Beijing. Zhou earlier this year floated the idea of replacing the dollar as the benchmark global currency with a basket of currencies, although he said it was a long-term possibility.

At present, the yuan, or renminbi, is not freely convertible on the current account, but is pegged to a basket of currencies and strictly controlled by the nation's foreign exchange authorities.

For the last few years, Hong Kong's banks have been allowed to offer exchange, remittance, credit-card and deposit-taking services in yuan, but these are strictly limited and most cross-border transactions are carried out in US dollars.

Yam said settlements under the new deal could start as early as next month.

Hong Kong and China operate under two different legal systems as part of the handover deal when the territory was returned to Chinese rule from colonial power Britain in 1997.

China has been Hong Kong's largest trading partner since 1985 and using the yuan as a settlement currency is expected to boost this relationship further by improving the transparency of product pricing.

It is also hoped it can cut firms' exchange costs and give them greater flexibility in dealing with changes in yuan pricing. However, the initial effect on foreign exchange rates is expected to be limited.