LONDON (Reuters) - Britain said on Friday it hopes to set up a currency swap line with China soon to help finance trade, a move that will enhance London's drive to become a leading offshore centre for yuan trade.
China, in an effort to internationalize the yuan and eventually make it a world reserve currency, has already agreed swap lines with more than 15 other countries, mostly emerging markets.
The Bank of England said on Friday it would work with China's central bank to sign a final agreement shortly on a reciprocal three-year yuan-sterling swap, building on its statement last month that it was ready "in principle" to adopt the swap line.
Britain, always anxious to bolster London's status as Europe's biggest financial centre, launched an offshore yuan currency and bond market to great fanfare last year.
A swap deal would cement its role as the leading centre in the Group of Seven industrialized nations for offshore trade in the yuan - also known as the renminbi - helping it to see off potential rival yuan centers such as Frankfurt, Paris and New York, market watchers say.
"We have already seen evidence in 2013 of a significant increase in renminbi trade in London, and today's announcement supports Britain's ambition to build a thriving renminbi market in London," British finance minister George Osborne said on Friday.
Figures from global transaction services organization SWIFT show that Britain is the leading centre for offshore yuan trade outside Asia and has made far more progress in getting companies to invoice in yuan than the United States, for example.
By comparison, the yuan bond market in Hong Kong, the biggest offshore centre for yuan trade, grew to around 350 billion yuan ($55.7 billion) in a little over two years from 2010, according to Thomson Reuters data.
The yuan is not freely convertible but China plans to make it basically convertible as early as 2015 and eventually put it on a par with the U.S. dollar.
The Bank of England said the swap arrangement would be used to finance trade and direct investment between the two countries and to support domestic financial stability if needed.
"In the unlikely event that a generalized shortage of offshore renminbi liquidity emerges, the Bank (of England) will have the capability to provide renminbi liquidity to eligible institutions in the UK," BoE Governor Mervyn King said.
A swap line would allow the Bank of England to supply yuan in exchange for other currencies if there were a sudden shortage in the London market, enabling a British company, for example, to pay for Chinese imports.
But if markets function well, there would be no need to use it. Many of the People's Bank of China's swap lines have not been used.
The swap deal would provide "a positive psychological effect", said Philippe Lintern, the co-head of European wholesale banking at Standard Chartered.
"Increased liquidity can only help boost the services that banks can offer to companies doing business with China," he added.
European and U.S. officials have been pressing China for years to do more to open up the yuan to market forces, saying its artificial weakness was one of the key imbalances of the global economy.
Beijing is slowly delivering, although it still keeps a tight rein on the currency for fear sharp appreciation would weaken its export-powerhouse economy, which has been the biggest engine of global growth for a decade.
Editing by Susan Fenton