KUALA LUMPUR, Sept 27 (Reuters) - Growing trade between China, the world's second largest economy, and Malaysia will encourage more yuan-denominated fundraising through the issuance of conventional and Islamic bonds, Malaysia's central bank chief said on Thursday.
China has become Malaysia's largest trading partner in recent years, importing products that range from palm oil to rubber tyres.
"The progress made thus far, while modest, has significant potential given the significant volume of the bilateral trade and foreign direct investment between our economies," central bank governor Zeti Akhtar Aziz said at a seminar on renminbi settlements.
Zeti said Malaysia is well-positioned to capitalize on the growing popularity of fundraising in renminbi, given the Southeast Asian country's market size and infrastructure.
Malaysia's sovereign fund Khazanah Nasional Bhd and telco Axiata Group Bhd have concluded offshore issuance of renminbi-denominated Islamic bonds, or sukuk.
"(With) China's greater prominence in the global economy, a dynamic response is required in this new operating environment," Zeti said.
"One of the changes that will shape the international financial system in the years to come is the wider role of renminbi in trade and finance," she added.
Malaysia's trade volume with China has expanded at 20 percent annually in the past two decades but only 1 percent of this total is settled in renminbi, said Zeti.
The volume of renminbi transactions is expected to grow as traders operating in China would be able to eliminate hedging and conversion costs by transacting in the local currency, she said.
In 2011 alone, China accounted 14 percent, or 167 billion ringgit of Malaysia's total trade. (Reporting By Al-Zaquan Amer Hamzah; Editing by Niluksi Koswanage)