CHINA will start widely-awaited direct trading between the yuan and the Australian dollar tomorrow, cutting transaction costs and boosting collaboration between the two countries, Australian Prime Minister Julia Gillard said yesterday.

The Australia & New Zealand Banking Group Ltd and Westpac Banking Corp have been approved by the People's Bank of China as market makers for the direct trading of the currencies, Gillard said at a press conference in Shanghai.

"This will be a huge advantage for Australia, not only for our big businesses, but also for our small and medium enterprises that want to do business here," Gillard said after meeting Shanghai's Party Secretary Han Zheng.

A survey conducted by global business information provider RFi for HSBC released last week showed that more than 40 percent of Australia's SMEs dealing in exports and imports with China intend to settle their trade in yuan this year.

The latest move will make the Australian dollar the third currency that can be traded with the yuan directly, without needing to use the US dollar as an intermediate currency, thus saving transaction costs for customers.

The direct trading between the yuan and Australian dollar "will facilitate trade flows between China and Australia," Dariusz Kowalczyk, senior economist of Credit Agricole, said yesterday. "We do not expect a lot of foreign exchange trading volumes as most flows are still settled in the US dollar, but the announcement represents an important move in collaboration between the two countries and in the development of offshore yuan markets."

The market has long expected China and Australia to set up the direct currency trading link after China in June started direct trading with the Japanese yen to facilitate exports and imports between Asia's largest economies and trim reliance on the US dollar.

China remained Australia's top trading partner in February, with trade of A$9.7 billion (US$10.1 billion), according to Australia's bureau of statistics.

Their central banks have a A$30 billion currency swap line to ensure market liquidity.