LONDON Britain is considering setting up a London-based clearing bank for the offshore yuan market to improve liquidity, a government minister said on Tuesday.
Chancellor George Osborne has been leading a drive to develop London as an offshore trading centre for the yuan, and last month eased the rules for Chinese banks to set up in Britain.
The Bank of England and China's central bank also signed a yuan swap line earlier this year to make it easier for traders in London to access the yuan, or renminbi, currency.
But the offshore yuan bond market has been slow to develop in London, while clearing of yuan foreign exchange transactions takes place only via Hong Kong.
"We will work together to keep (the market) liquid, including through appropriate settlement and clearing arrangements such as a London clearing bank," Sajid Javid, financial secretary to the UK Treasury, told a conference on the offshore renminbi.
Chinese banks are likely to compete for the role of London-based clearing bank.
"Should London decide to pursue a local infrastructure arrangement, Chinese banks have a great advantage in providing clearing services ... and more liquidity support in London," Wenjian Fang, CEO of Bank of China (UK), told the conference.
The yuan has increased rapidly as an international currency following relaxation by the Chinese authorities, and is now the 12th most used payment currency in the world, according to data from financial services provider SWIFT.
But the scope for further development is huge, given only 13 percent of China's trade with the rest of the world is currently settled in yuan.
China's carefully managed programmed for foreign investors (RQFII) is also being expanded beyond Hong Kong, giving London-based investors the right to buy up to 80 billion yuan ($13.1 billion) of stocks, bonds and money market instruments.
Javid, who is in charge of relations with the financial service industry, said he hoped the first RQFII license to a UK entity would be awarded before the end of the year.