China's currency is pegged to the dollar, and has large US reserves, indicating that the currency is ultimately mostly backed by US government debt, but its central bank has been gradually appreciating it against the US currency.
China invented paper money, but its use was banned following high inflation and economic collapse.
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From 1971, the world has again moved to paper fiat money. The monetary authority said China's currency has been "gradually evolving as a globally acceptable currency."
"China is recognized today as the world’s second largest economy, while also being a leading player in international trade, investments, and foreign reserves," the Central Banks said in a statement.
"Since Sri Lanka too has a growing volume of trade and investments transactions with China, the use of the Chinese currency, Renminbi, in banking transactions would significantly facilitate such trade and investments.
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Sri Lankan banks are now permitted to do international transactions in the Australian Dollar, Canadian Dollar, Danish Kroner, Euro, Hong Kong Dollar, Yen, New Zealand Dollar, Norwegian Kroner, Sterling, Singapore Dollar, Swedish Kroner, Swiss Franc and US dollars.
China has become a key donor of Sri Lanka in recent years and is a key source of imports to the country. Political links between the two countries have also strengthened.