Prime Minister Julia Gillard has flagged a deal that will see the Australian dollar as the third currency convertible directly into the Chinese yuan.

Ms Gillard made the comments during a visit to Shanghai, where she also announced the city will host an Australian tourism, trade and investment fair next year.

Pre-empting a formal announcement tomorrow, Ms Gillard said the dollar would now be convertible directly into renminbi, the Chinese currency colloquially also known as yuan.

"The third currency in the world to do so after the US dollar and the Japanese yen," she said.

"This is 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."

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The move means Australian and Chinese firms trading with each other will not have to first convert currency into US dollars and then on into either renminbi or Australian dollars, saving a small amount in transaction costs.

Initially, ANZ and Westpac will be the two Australian banks licensed to make the market for the currency in China.

Westpac's chief executive Gail Kelly says the deal simplifies trade and investment between the two nations.

"It certainly improves convenience for our customers and takes cost out for our customers to have the direct convertibility between the Australian dollar and the Chinese renminbi," she said.

'Makes perfect sense'

The deal to make the Australian dollar convertible with the renminbi has come before any such move with the euro, the world's second most traded currency.

However, Daily FX currency strategist Ilya Spivak says the deal is not surprising, with the Australian dollar passing the Swiss franc to be among the five most traded currencies in the world.

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"I think it makes perfect sense," he said.

"Australia is an absolutely crucial trading partner for China, and I don't think anybody is really in a hurry in China to create convertibility with the euro given the instability in the euro area."

Mr Spivak says trade between the two currencies is unlikely to be very large in the early stages, but it will make it cheaper for companies in the two countries to do business with each other in the long term.

"It's something that is a barrier that's now been removed that will be helpful longer term, in terms of reducing transaction costs and making sure that the relationship between China and Australia remains strong on the trade side of things," he added.

The Australian Chamber of Commerce and Industry agrees that the direct currency convertibility will enhance trade between the two nations and make a small contribution to the competitiveness of Australian firms in the Chinese market.

"Making it easier to do business often involves a myriad of small steps, of which today's announcement is just one, but an important and welcome one," said ACCI's chief executive Peter Anderson in a statement.

G'day Shanghai

Ms Gillard's trip to China is designed to emphasise the diversity of the trade and economic relationship with China beyond the vast resources exported from Australia.

Australia's two-way trade with China 2008 $73.8 billion 2009 $85.1 billion 2010 $105.3 billion 2011 $121.1 billion Source: DFAT

Earlier today the Prime Minister announced plans for a $1.75 million trade fair in Shanghai.

The fair will be modelled on the 'G'day USA' program held in the United States each year, with participation by celebrities, state and territory governments and the private sector.

"Our aspiration is to take some of the things that we've learned from our very successful work both in LA and in New York, where we have got a white-hot spotlight on Australia, and the opportunities and advantages of doing business with Australia, of coming to Australia, of being a consumer of Australian cultural exports," Ms Gillard said.

While in China Ms Gillard has also held talks with president Xi Jinping.

The pair have discussed economic matters, however there is still no end point in sight for the free trade negotiations which were started eight years ago.