Jakarta. Indonesia and China have agreed to work on and promote a framework of direct settlement between the rupiah and yuan, marking a significant milestone for the two countries' trade and investment transactions. 

Perry Warjiyo, the governor of Bank Indonesia, the country central bank, and his Chinese counterpart Yi Gang, the governor of The People's Bank of China, signed the memorandum of understanding for the framework on Wednesday. 

"This collaboration marks a key milestone in strengthening bilateral financial cooperation between China and Indonesia," Bank Indonesia said in a statement. 

"The authorities believe that it will positively contribute to encouraging the use of local currencies for settlement of trade and direct investment between the two countries," Bank Indonesia said. 

China is Indonesia's largest trading partner, with more than $73 billion worth of goods exchanged between the two countries annually. Chinese investors have also growing to become important sources of investment in Indonesia, including in high-profile projects like the Jakarta-Bandung high-speed train project in West Java and the $10 billion Weda Bay industrial complex in Sulawesi.

Exporters, importers, and investors often settle those transactions using the US dollar, simply because the currency is widely available in both countries' banking system. But, that often makes such trade costlier execute and exposing them to the volatility in the global market.  

Under the agreement Bank Indonesia and The People's Bank of China would work to promote "the use of local currencies for trade and direct investment settlement, which includes, among others, promotion of the direct exchange rate quotation and interbank trading between the Chinese yuan and the Indonesian rupiah," the central bank said. 

Both the central banks would share information and hold discussions regularly to advance the cooperation, Bank Indonesia said. 

The agreement with China was the latest of its kind that Indonesia had pursued in the past few years. Previously, Bank Indonesia already has a local currency settlement framework in place with Malaysia, Thailand, since 2018 and with Japan since last August. 

The local currency settlement framework addresses the liquidity concern by ensuring a selected number of local banks holding enough liquidity in the foreign currency for settling the transaction.