BEIJING/FRANKFURT China accelerated plans to internationalise its currency on Thursday by agreeing to swap euros and yuan with the European Central Bank in a deal that is set to be China's second-largest to date.
The bilateral currency swap agreement between the European Central Bank (ECB) and the People's Bank of China (PBOC) is valid for three years and has a maximum size of 350 billion yuan, or 45 billion euros (38.1 billion pounds).
The deal is the latest of a string of currency swaps that China has created with other nations to promote usage of the yuan in global commercial and financial transactions, with the ultimate goal of rivalling the dollar as a reserve currency.
"The emphasis is on renminbi internationalisation," said Louis Kuijs, an RBS economist in Hong Kong.
He said currency swaps also provide central banks with additional liquidity in times of financial emergencies, though this function is of secondary purpose in China's swap agreements.
The swap deal with the ECB is China's second-biggest with a foreign central bank, after South Korea's 360 billion yuan swap line. China also has a 400 billion yuan swap agreement with Hong Kong.
As China's second-largest trade partner, Europe is a natural destination for Beijing in raising the yuan's profile. The interest is reciprocated by some European nations such as Britain and Germany which want to be the clearing centre for the yuan in Europe and provide what may be a lucrative financial service.
The yuan is now the world's eighth most-traded currency, financial services provider SWIFT said this week, with a market share of 1.5 percent and overtaking the Swedish krona, the South Korean won and the Russian rouble.
China's swap deal with the ECB comes after French President Francois Hollande said in June that France is working on setting up a currency swap line with the world's No. 2 economy.
Bank of France Governor Christian Noyer welcomed the agreement on Thursday.
"Banks in the euro zone and France will henceforth have the security they need to develop their activities in renminbi over the long term," Noyer said in a statement to Reuters.
Only Hong Kong has been anointed by Beijing as an official offshore trading centre for the yuan, although banks in Taiwan and Singapore also provide similar services.
With its status a centre for global foreign exchange trading, London appears to be the forerunner in clinching an agreement with Beijing to become Europe's offshore yuan trading centre, Chinese academics have said.
Indeed, SWIFT said its data showed 60 percent of yuan trades are done out of Britain.
($1 = 0.7398 euros)
(Reporting by Koh Gui Qing in BEIJING, Jean-Baptiste Vey in Paris and Frankfurt Newsroom; Editing by Kim Coghill)