Editor’s Note: Another nail in the Dollar’s coffin.
The Bank of England expects to sign a final agreement to set up a three-year yuan-sterling swap line “shortly”, during a meeting between Sir Mervyn and his counterpart Zhou Xiaochuan in Beijing.
European and US officials have been pressing China for years to do more to open up the yuan to market forces, saying its artificial weakness was one of the key imbalances of the global economy.
Beijing is slowly delivering, although it still keeps a tight rein on gains for the currency for fear it will weaken its export-powerhouse economy, which has been the biggest engine of global growth for a decade.
This would be the latest in a string of bilateral currency agreements that has seen cross-border trading of the yuan expand four-fold since August 2010, and the first with a major developed economy.
Britain’s central bank has been eyeing such a deal for some time, saying last month it was ready “in principle” to adopt a currency swap line with its Chinese counterpart as the yuan starts to emerge as a world reserve currency.
It said the arrangement would be used to finance trade and direct investment between the two countries and to support domestic financial stability if needed.
“In the unlikely event that a generalised shortage of offshore renminbi liquidity emerges, the Bank of England will have the capability to provide renminbi liquidity to eligible institutions in the UK,” said Sir Mervyn, using an alternative name for the Chinese currency.
Britain, anxious to bolster London’s status as Europe’s biggest financial centre, launched an offshore yuan currency and bond market to great fanfare last year.
