UK, China central banks to discuss currency swap line

LONDON (Reuters) - The Bank of England said on Friday it would discuss setting up a reciprocal three-year yuan-sterling swap line with the People's Bank of China to finance bilateral trade and investment.

The two central bank banks will work together to sign the final agreement shortly, it added.

The latest step builds on the BoE's statement last month that it was ready "in principle" to adopt a currency swap line with its Chinese counterpart, as the yuan or the renminbi starts to emerge as a world reserve currency.

The BoE said on Friday 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 generalized shortage of offshore renminbi liquidity emerges, the Bank (of England) will have the capability to provide renminbi liquidity to eligible institutions in the UK," BoE Governor Mervyn King said.

This would be the latest in a string of bilateral currency agreements that China has signed in the past three years to promote use of the yuan in trade and investment.

European and U.S. 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.

Britain, always 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, and a swap deal would cement its role as the leading centre in the Group of Seven industrialized nations for offshore yuan trade.

(Reporting by Olesya Dmitracova and William Schomberg; Editing by Jeremy Laurence)