Story highlights Australian central bank to invest 5% of foreign reserves in Chinese bonds

Bond investment is Australia's newest economic move tying country to China

Australia set up direct currency link with China earlier this April, following U.S., Japan

Chile, Japan, Malaysia all hold renminbi assets, some referred to as "dim sum" bonds

The Australian central bank plans to invest about 5 per cent of its foreign reserves in Chinese government bonds, in the latest move to build closer economic ties between the two countries.

"This decision to invest in China is an important one. It reflects the broader economic relationship between China and Australia and our increasing financial ties", Philip Lowe, deputy governor of the Reserve Bank of Australia, said in a speech on Wednesday in Shanghai. "It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets."

Earlier this month, Australia became only the third country to establish a direct currency trading link with China, after the US and Japan. The RBA and the People's Bank of China also set up a currency swap facility in March 2012. The RBA had around A$38.2bn ($39bn) in foreign reserves at the end of March.

China is Australia's top export destination, and its biggest source of imports. Last year, more than a quarter of Australia's exports -- mainly commodities -- went to China, up from less than 5 per cent during the 1990s, according to the RBA.

Australia will join a small but growing band of central banks that have looked to China to diversify their foreign reserves.

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Chile, Japan, and Malaysia all hold renminbi assets, often in the form of offshore bonds -- known as "dim sum" bonds -- while Nigeria's central bank holds around 10 per cent of its reserves in the Chinese currency.

Recent regulatory changes have opened up China's onshore bond and equity markets to global investors through the renminbi qualified institutional investor (RQFII) quota scheme.

Foreign investors were previously limited to investing in the equity market, and to using US dollars. Mr Lowe said the PBoC had already approved a quota for the RBA to invest.

In March last year, Japan became the first major developed country to receive approval to invest directly in Chinese sovereign debt.

China has sought to open up new investment channels for renminbi holders as part of its efforts to internationalise its currency. Limited investment avenues have been one factor deterring foreign companies from receiving trade earnings in the Chinese currency.

But Mr Lowe said he was optimistic that once some of the existing constraints were overcome, the renminbi would "become the invoicing currency of choice for many businesses on both sides of our trading relationship".

Last year, around 12 per cent of China's trade was settled in renminbi, but that is forecast to rise to about 15 per cent this year by Deutsche Bank.