The People's Bank of China, China's central bank, announced on Monday its intention to commence currency swaps between the yuan and five major convertible currencies in China's inter-bank forex market.

The five currencies are the U.S. dollar, the euro, the Japanese yen, the Hong Kong dollar and the pound sterling.

According to a circular released by the central bank, the launch of the new business aims to improve China's financial market system and to reduce exchange rate risks.

Currency swaps can also be used as a tool by the central bank to manage liquidity, said Peng Xingyun, a researcher with the Chinese Academy of Social Sciences.

Domestic institutions qualified to operate in the inter-bank forward forex market can make yuan-forex currency swaps after putting on applications and risk-control records at the State Administration of Foreign Exchanges (SAFE), said the circular.

All yuan-forex currency swaps should be made through the China Foreign Exchange Trade System of the central bank, it said.

The central bank and SAFE will manage and supervise the currency swaps, according to the central bank.

China has launched the forward RMB exchange transactions and the swap transactions of RMB versus foreign exchange since China reformed the RMB exchange rate mechanism in July 2005. The RMB-forex swap transactions refer to principal exchanges between RMB and foreign currency on two different settlement dates and with exchange rates that are agreed on both parties.