The Bank of England and the People's Bank of China plan to sign a deal soon on a three-year currency-swap arrangement as London pushes to become an offshore center for yuan trading.
BoE Governor Mervyn King and his PBOC counterpart, Zhou Xiaochuan, met in Beijing yesterday, and their central banks will "facilitate" discussions on the yuan-sterling swap, the BoE said.
"The arrangement would be used to finance trade and direct investment between the two countries and to support domestic financial stability should market conditions warrant," the BoE said. Mr King and Mr Zhou agreed to "work together to sign the final agreement shortly."
A role for London as an offshore center for yuan trading would help it to deepen links with the world's second-largest economy. UK chancellor of the exchequer George Osborne welcomed yesterday's announcement, which he said will "cement" London as a western hub for the yuan market. China already has currency-swap agreements with countries including Australia, South Korea and Malaysia.
"It's very significant for yuan internationalization," Nathan Chow, a Hong Kong-based economist at DBS Group, said. "Unlike Thailand or Mongolia, the UK is an international financial center and a hub for Europe. The low usage of yuan in global trade is inconsistent with China being the world's second-largest economy."
China has allowed businesses to settle foreign trade in yuan and signed swaps to promote the use of the currency in international trade and investment. It has also eased rules for foreign companies to invest in the country using yuan raised offshore and started direct trading with currencies including the yen as part of efforts to make the yuan a global currency.
Cross-border trading of yuan expanded four-fold since August 2010 to almost 200 billion yuan in October last year, Euroclear Bank said in a statement in December, citing Hong Kong Monetary Authority figures. China has currency- swap agreements totaling about 1.8 trillion yuan, the Taipei- based Chung-Hua Institution for Economic Research said in a report in November.
Yesterday's "announcement supports Britain's ambition to build a thriving renminbi market in London," Mr Osborne said, using an alternative name for the Chinese currency. "It is another sign that in the global race, Britain is seen as open for business by emerging and established markets alike."
* Bloomberg News