BEIJING - The People's Bank of China (PBOC) doubled the size of a currency swap with Hong Kong to 400 billion yuan ($63 billion) on Tuesday, in a move aimed at giving the financial center a bigger relief valve to cope with rising demand for trade settlement in the currency.

The expansion will also boost confidence in the government's intention to internationalize the yuan. The currency has taken a knock in recent weeks as trade limits between Hong Kong and the mainland were hit and offshore yuan prices diverged significantly from onshore prices.

During the past two years, China has used Hong Kong as its main testing ground for boosting trade settlement in the tightly controlled yuan.

The new swap agreement will "surely facilitate" yuan trade and settlement, said Tang Yunfei, an economist with Founder Securities Co Ltd in Beijing.

"Through the expanded currency swap deal, Hong Kong could get more liquidity from the mainland," said Tang.

The new agreement replaces 200 billion yuan currency swap deal signed in January 2009, according to a statement from the Hong Kong Monetary Authority (HKMA).

Since 2008, China has signed a number of yuan swap agreements with countries such as South Korea, Malaysia, Indonesia, Argentina, Singapore and New Zealand to promote the currency in international trade.

The result has been a relative surge in the use of the currency, particularly in Hong Kong.

More than 9 percent of China's total trade was settled in yuan in 2011, up from just 0.7 percent a year earlier.

Of all China trade settled in yuan in the first half of 2011, 84 percent was carried out by Hong Kong banks, up from 73 percent in the whole of 2010.

The explosion in yuan trade has boosted yuan deposits in Hong Kong which totaled 622 billion yuan as of the end of September and accounted for more than 10 percent of total deposits, up from around 1 percent in January 2010, HKMA data shows.

Wary of "hot money" inflows swamping the relatively underdeveloped onshore markets, the government has strictly controlled the development of the offshore market in Hong Kong by setting trade-settlement limits and approving inward yuan flows on a case-by-case basis.

It has allowed corporates and banks to trade yuan freely outside the mainland since last June, but a reluctance to expand trade quotas quickly has resulted in growing volumes of trade hitting sudden roadblocks.

In October 2010, the HKMA tapped 20 billion yuan of its swap line with the central government to settle trade.

Last month, China expanded the trade settlement quota for the fourth quarter to 8 billion yuan, having set quotas of 4 billion yuan for each of the first three quarters of the year.

The doubling of the currency swap should deliver a shot in the arm to the spreading cross-border scheme and encourage more corporates to use the yuan as a trade-settlement currency, market sources said.

An offshore currency and bonds market that quickly developed around the increased yuan flows in Hong Kong has taken a knock in recent weeks as the offshore price deviated as much as 3 percent from mainland prices, an unwelcome fluctuation for many companies that rely on thin margins.

Reuters