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 centre for yuan trading.
BOE governor Mervyn King and his PBOC counterpart, Zhou Xiaochuan, met in Beijing yesterday. Both central banks will "facilitate" talks on the yuan-pound arrangement, 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," it said.
King and Zhou agreed to "work together to sign the final agreement shortly".
A role for London as an offshore centre for yuan trading would help it to deepen links with the world's second-largest economy. The latest move towards a deal comes a month after the BOE's chief cashier, Chris Salmon, said the British central bank is ready "in principle" for a currency-swap agreement with the PBOC.
Xia Bin, a former PBOC adviser, said in December that Britain needs to build closer ties with the PBOC for progress on a deal. Seventeen countries have currency swap agreements with China, and Britain was not one of them, Xia said at the time.
Cross-border trading of yuan has expanded fourfold since August 2010 to almost 200 billion yuan (HK$249 billion) in October last year, Euroclear Bank said in December, citing figures from the Hong Kong Monetary Authority.
"London is growing rapidly as a centre for [yuan] business," King said.
The swap line will "support UK domestic financial stability. In the unlikely event that a generalised shortage of offshore [yuan] liquidity emerges, the bank will have the capability to provide [yuan] liquidity to eligible institutions in the UK".