China and Hong Kong have signed an agreement that will remove certain restrictions on how the yuan can be used and circulated in Hong Kong, Dow Jones reports.

The move marks a milestone in the internationalisation of the Chinese currency and makes available more yuan-denominated investment products in the city. The strengthening trade and economic ties between China and Hong Kong have created a growing demand for the yuan in the latter, the news service said.

The Hong Kong Monetary Authority warned, however, that local banks should be on guard for potential money laundering activities and counterfeiting.

The new deal is meant to "speed up the development of the interbank market for yuan in Hong Kong... and will also open up more channels for yuan financing," Peter Pang, the deputy chief executive officer for HKMA, was quoted as having said.

Hong Kong banks currently work with basic yuan transactions, like deposits, trade settlements, and remittances, with BOC Hong Kong as the only yuan-clearing bank. Under the revised guidelines, there will be no restrictions on the transfer of yuan funds between accounts or banks in the city. It also opens up a wider market for the insurance and wealth management space.

The changes apply to corporate clients and individuals, provided that individuals follow a RMB20,000 ($2,948) purchase cap. Corporate clients will not be subject to a cap.