UK and China in £21bn currency swap deal

Sir Mervyn met with Governor Zhou Xiaochuan earlier this year in China

The Bank of England and its Chinese counterpart have signed a deal likely to boost trade between the UK and China in the yuan.

The Bank and the People's Bank of China have signed a three-year currency swap arrangement worth 200bn yuan (£21bn, $33bn), the UK central bank confirmed.

The UK is looking to become a centre for the Chinese currency, also known as the renminbi.

British banks hold 35bn yuan worth of deposits in the Chinese currency.

Currency-swap agreements allow central banks to swap currencies and can be used by firms to settle trade in local currencies rather than in US dollars, as happens now, since China's currency is not fully convertible to other currencies.

The prospective deal was first announced in February by BoE Governor Sir Mervyn King.

"In the unlikely event that a generalised shortage of offshore renminbi liquidity emerges, the Bank will have the capability to facilitate renminbi liquidity to eligible institutions in the UK," Sir Mervyn said on Saturday.

Last year, the UK Treasury announced plans to make London - the world's largest currency trading hub - the leading international centre for trading the yuan outside mainland China and Hong Kong.

China has been gradually relaxing strict controls on the value of its currency and on flows of capital.

Beijing has been using these pacts as part of its push for a more global role for the yuan.

It has a swap agreement with Brazil worth $30bn and has also signed similar agreements with other trading partners such as Japan, Australia and Hong Kong.