Companies in Hong Kong will be allowed to use Renminbi (RMB) to settle trades with their counterparts in five major Chinese cities as soon as next month, People's Bank of China (PBOC) and Hong Kong's monetary jointly announced on Monday.

The pact with Hong Kong to use RMB as a settlement currency for trade is the latest step toward Beijing's long-term aim of internationalizing the Chinese currency. At present, RMB isn't fully convertible under the capital account.

The agreement, which had been expected, will allow Hong Kong banks to carry out more RMB business, a potential benefit to consolidate Hong Kong's role as an international financial center, the central bank released in a statement.

The move will make the operation of Hong Kong enterprises more flexible as well as allow banks to extensively expand their RMB services, increase the local capital liquidity of RMB, and bolster the currency's clearing platform in Hong Kong, said Donald Tsang, Chief Executive of Hong Kong Special Administrative Region(HKSAR).

Cities involved in mainland China include Shanghai, Guangzhou, Shenzhen, Zhuhai, and Dongguan. Further implementation on arrangements will be released after mainland authorities announce operational details, with the first transaction expected to be processed in July once the details are confirmed.

The pact was signed on Monday by the authority's chief executive Joseph Yam and the bank's governor Xiaochuan Zhou.

Yam said developing RMB business in Hong Kong is the Government's policy, adding its long-term objective is to develop Hong Kong as a RMB-clearing centre outside the Mainland.

I hope the Renminbi business in Hong Kong will continue to develop, consistent with the policy direction of further developing a mutually-assisting, complementary and interactive relationship between the financial systems of the Mainland and Hong Kong, Yam said.

Financial Secretary John Tsang said the pilot scheme will strengthen the role of Hong Kong as a testing ground for the use of RMB outside the mainland and will give Hong Kong enterprises more flexibility in their operations.

China