China and Taiwan's agreement on a clearing system for each other's currency marks the start of the final stage of an economic integration that has drawn Taiwan closer to its one-time political foe and lifted trade to more than US$160 billion (S$198.4 billion) annually.

The deal on the clearing system after three years of talks brings closer together the two sides' financial sectors, the last remaining laggard among burgeoning ties in other sectors, though any benefits will take time as full details of the system are yet to be worked out.

Under the agreement, there will no longer be a need to convert each other's currency into US dollars first in trade transactions, while Taiwan's banks will be allowed to offer loans in yuan to entities outside Taiwan.

However, neither side has named a clearing bank and no timetable has been set on allowing companies and individuals to trade the yuan directly, limiting banks' hopes for meaningful earnings contribution in the short term.

China is planning to make the yuan basically convertible as early as 2015 and, further down the road, turn it into a global currency on par with the US dollar.

The agreement would set Taiwan up for a role in this internationalisation of the yuan, boosting global payments settled in the currency.

TODAY