The new currency swap agreement between the European Central Bank and the People's Bank of China has been in the works for the past few months.
Under the terms of the deal between the European Central Bank and the People's Bank of China, the swap facility could total as much as 350 billion yuan and €45 billion.
The agreement is one of the largest currency deals between China and a non-Asian trading partner and will last for three years.
Europe and China trade roughly €480 billion in goods and services each year, and the European Union is China's biggest export market.
China is pushing to internationalize the yuan, and the currency is being used to conduct a growing number of transactions on international markets.
For years Beijing has kept tight control of the yuan, pegging the currency to the U.S. dollar as a way of promoting manufacturing in its export-driven economy, though it has slowly been loosening its hold recently.
The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.
"It's a way of promoting European and Chinese trade, but not doing it with the U.S. dollar," said Brooks. "It's a bit like cutting out the middleman, all of a sudden there's potentially no U.S. dollar risk."
In June, China struck a similar agreement with the Bank of England worth up to 200 billion yuan.
A spokesperson for the ECB said the deal had been in the works for the last few months.
In September, the Bank for International Settlements announced the Chinese yuan was the ninth most traded currency in the world.
The yuan was involved in 2.2% of foreign exchange trading worldwide in April, the period examined by the report, more than double its share in April 2010.
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