The Egyptian pound, pegged at 8.83 to the dollar, has since been trading at banks for as high as 18 pounds per dollar.
Under the deal, Egypt can use the yuan in transactions with China which can use the Egyptian pound in return transactions, Hany Farahat, senior economist at investment bank CI Capital, told AFP.
"It's as if you have limited transactions between the two countries to the two local currencies, so there is no need to resort to any other foreign currency in bilateral dealings between Egypt and China," Farahat said.
The agreement is for an initial three years but can be extended by mutual consent, Egypt's central bank said in a statement on its website.
Cairo has been struggling to boost its foreign currency reserves in the political and economic turmoil that has followed the January 2011 uprising that toppled former ruler Hosni Mubarak.
On November 11, the International Monetary Fund approved a $12-billion loan for Egypt, just over a week after Cairo floated its currency as part of an economic reform package linked to the loan.
The Egyptian pound, which had been pegged at 8.83 to the dollar, has since been trading at banks for as high as 18 pounds per dollar.
The IMF approval came after Cairo took crucial steps to meet its loan requirements, including slashing fuel subsidies, announcing a value added tax, and floating the pound.
"The effect will be positive because it will translate into higher liquidity at the central back in the equivalent amount, plus that it will have an indirect impact on reducing demand for US dollars," Farahat said of the deal with China.