Bank of England Governor Mervyn King and his Chinese counterpart Zhou Xiaochuan agreed to a three-year currency swap line to promote financial stability and aid trade between China and Britain.
The maximum value of the arrangement is 200 billion yuan ($33 billion), according to a statement published by the U.K. central bank on its website in London today. A yuan is a unit of renminbi, the name of China’s official currency.
“The establishment of a sterling/renminbi swap line will support U.K. domestic financial stability,” King said in the news release. “In the unlikely event that a generalized shortage of offshore renminbi liquidity emerges, the bank will have the capability to facilitate renminbi liquidity to eligible institutions in the U.K.”
The agreement puts the Bank of England first in a race among European central banks to establish swap facilities with China, allowing London to expand its ties with the world’s second-biggest economy. The U.K. capital is the center of the world’s $4 trillion-a-day market for foreign-exchange trading.
China already has currency-swap agreements with countries including Australia, South Korea and Malaysia. The Bank of England’s chief cashier, Chris Salmon, said in January that the idea of London as a major yuan center “carries much force.”
The accord is one of the final legacies of King, who will leave the central bank at the end of this month. It is also the culmination of a flurry of economic diplomacy with China at a time when rival European centers are also jostling for a role in trading yuan. King had met Zhou in February and agreed to “facilitate” discussions.
“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,” King said today. “I am grateful to Governor Zhou and the staff at the PBOC, with whom it has been a pleasure to work.”
Bank of France Governor Christian Noyer said in an interview last month he’s seeking agreement among euro-area central banks for ways of providing liquidity support in Chinese yuan. Paris is competing with London and Zurich to become the center for yuan trading in Europe as China makes its currency more widely used around the world.
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