The internationalization of China's bond market took a step forward Monday with an agreement signed between the country's main central securities depository and Euroclear Bank, in a move that aims to eventually allow international investors to use yuan-denominated bonds as collateral on overseas markets.

China Central Depository and Clearing (CCDC) signed a memorandum of understanding with the Brussels-based settlement and securities services provider in Shanghai, with the aim of boosting cross-border services and supporting the further opening of the Chinese interbank bond market, according to a statement published on Euroclear's website.

Euroclear added that both sides would look to "provide cross-border collateral management services," with the goal of promoting the use of "RMB-denominated securities as collateral in the international financial market."

Allowing foreign investors to use yuan-denominated bonds as collateral anywhere in the world would be a big boost to the internationalization of the Chinese currency.

After joining the International Monetary Fund's SDR basket of currencies in 2016, the yuan still has a long way to go in terms of use overseas, representing around two percent of the value of global institutional and commercial payments.

Speaking at a signing ceremony for the MoU, CCDC Chairman Shui Ruqing called the agreement "a strong first step towards our goal of easing access for investors to the China Interbank Bond Market without changing the way they access other markets." 

Euroclear Bank CEO Valerie Urbain said that the MoU signifies "a true commitment towards opening a cross-border link and explore new opportunities which will benefit the global capital markets."

Talking to the Financial Times, Urbain later added that cooperation between the CCDC and Euroclear would aim to cut red tape for overseas investors looking to access China's bond market, saying "it's very much for the financial investors who are not willing to go the local route."

The agreement with Euroclear Bank comes after several moves to open up China's bond market to international investors in recent years.

The Bond Connect system was established in 2017 and allows overseas investors to invest in the Chinese mainland's interbank bond market using financial institutions on the mainland and in Hong Kong.

Last month was a record for Bond Connect in terms of trading volume, with 338.6 billion yuan (about 47.8 billion U.S. dollars) worth of securities traded through the system.

Other moves to open up the bond market have seen Chinese government bonds added to the Bloomberg Barclays Global Aggregate index since April this year. By the time that all 363 securities are added by the end of 2020, Moody's estimates that their inclusion on the index could lead to two trillion U.S. dollars' worth of inflows into China's onshore bond market.