UK, China reach £21-bn currency swap deal

In a decisive move, Britain and China have signed a 200 billion yuan (£21 billion) currency swap deal over the weekend which is expected to help London eventually become a global trading centre for offshore yuan.

The agreement signed by the Bank of England (BoE) governor Mervyn King, and his Chinese counterpart Zhou Xiaochuan of People's Bank of China (PBoC) on Saturday in London is expected to promote bilateral trade between the two countries and to support domestic financial stability should market conditions warrant, the BoE said in a statement.

The deal will establish a reciprocal three-year currency swap line between Britain's sterling and Chinese yuan, also known as renminbi, with a maximum value of 200 billion yuan.

Commenting on the deal, Mervyn King, who is ending his 10-year term as the central bank chief later this month, said: ''It is a testament to the outstanding working relationships between the Bank of England and the People's Bank of China that this swap line has now been signed.''

''The establishment of a sterling / renminbi swap line will support UK domestic financial stability. In the unlikely event that a generalised shortage of offshore renminbi liquidity emerges, the Bank will have the capability to facilitate renminbi liquidity to eligible institutions in the UK,'' King further stated.

The agreement follows months-long talks between BoE and PBoC that were initiated in February.

Starting with South Korea in 2008, China has over 2 trillion yuan worth of currency swap agreements with around 20 countries and regions, including Hong Kong, Singapore, Malaysia, Thailand, Kazakhstan, Pakistan, Australia, New Zealand, Brazil and Argentina among others.

But, this is the first such agreement between the world's second-largest economy and a major developed nation outside the Asia-Pacific.

These arrangements are aimed at encouraging China's trade partners to use yuan as a kind of foreign reserve and diversify the currency in the country's foreign reserves.

It is believed that the measures might help the Chinese goal of internationalisation of the country's currency, although bottlenecks remain due to Beijing's tight financial regulations. China has never indicated when the currency convertibility could happen, but some economists expect that it could be even as early as 2015.

City of London had launched an initiative in April 2012 to develop London as a centre for yuan business aiming to provide leadership to wider financial markets, advise the Treasury on London's capacity to trade, clear and settle yuan, and maintain private sector dialogue with regulators in Hong Kong and China on yuan's international markets.

Currently Hong Kong is the only full-fledged offshore yuan trading hub, while other cities competing to gain the status include Taiwan, Singapore, Tokyo, Kuala Lumpur, Luxembourg etc.

Britain's 200 billion yuan swap line is the same as that of Australia and Brazil, but lower compared to Hon Kong's 400 billion and Singapore's 300 billion.

London's yuan trading has been growing steadily over the past one and a half years with average daily trading volumes reaching $2.5 billion in 2012, a rise of about 240 per cent over 2011, according to City of London.

Britain already has currency swap deals with the US Federal Reserve, the European Central Bank and the Bank of Japan.