LONDON Britain and China signed an agreement to set up a clearing service for renminbi trading in London on Monday, days after Germany clinched a similar deal in the race to capture a share of the fast-growing Chinese foreign exchange market.
Britain said last week it was on course to be the first country outside Asia to set up a clearing service with China. But that was before a deal on Friday which made Frankfurt the first centre of such payments in Europe.
China is a focus of the British government as it tries to boost the country's exports, including those from its powerful financial services industry.
Analysts say London - despite the competition from Frankfurt and other European centres such as Luxembourg and Paris - looks best placed to become Europe's main offshore yuan centre given its role as the world's biggest foreign exchange hub.
Spencer Lake, global head of capital financing at HSBC, said Frankfurt pipping London to a deal would soon be forgotten.
"London is already recognised, along with New York, as one of the biggest financial centres globally. It has made a lot of progress positioning itself as a renminbi hub. Frankfurt and Paris are following suit," Lake said.
London's ambitions got a boost last year when China gave British investors the right to buy up to 80 billion yuan of mainland stocks, bonds, funds and money market instruments directly using its currency.
But development of a yuan bond market has been slower to take hold, and more bonds have been listed in Luxembourg than London.
The renminbi is jostling with the Swiss franc as the world's seventh most-used currency for payments, according to global transactions organisation SWIFT.
The market in "dim sum" bonds, designed to be traded outside China, is growing fast and is likely to exceed 750 billion yuan (72.32 billion pounds) by the end of 2014, according to Standard Chartered.
Analysts say the potential for growth is huge, given how tightly China has controlled the market so far.
Hong Kong is by far the largest centre for offshore yuan deposits, according to consultancy PwC. Deposits in Taiwan, Singapore and Macau also dwarf those in Luxembourg, Paris or London. New York lags far behind Europe.
HSBC's Lake estimated the proportion of Chinese trade conducted in renminbi will grow to 30 percent in the next three to five years, from 18 per cent at present.
The Bank of England said the institution that will act as the clearing bank in London will be named "in due course."
"The move towards greater internationalisation of the renminbi by the Chinese authorities is one of great importance that the Bank strongly supports," BoE Deputy Governor Jon Cunliffe said in a statement.