London will be the base for the first clearing bank outside Asia for the Chinese currency, supporting Britain's push to be the leading western centre for offshore renminbi trading.
People's Bank of China (PBC), the country's central bank, has appointed China Construction Bank as the UK's first clearing bank for renminbi.
China, the world's second-biggest economy, is promoting the use of its currency in international trade and is expected to further liberalise the renminbi in the next few years. London is competing with New York, Paris and other financial centres to be the top offshore renminbi centre outside Asia.
London, which dominates world foreign exchange trading, is the biggest offshore centre for renminbi payments. Outside China and Hong Kong, two in three payments take place in London, the UK Treasury said.
The announcement concludes months of talks and coincides with a trade visit to the UK by China's premier, Li Keqiang. His first trip to Britain since becoming prime minister is expected to lead to about £18bn of deals.
BP said on Tuesday it had signed a long-term deal to supply liquefied natural gas worth about £12bn to China and Rolls-Royce has agreed to co-operate with SNPTC, a Chinese nuclear reactor maker, on civil nuclear power projects.
The currency deal between the UK and China follows the Bank of England's agreement in March with PBC to make London a hub for Chinese currency dealing.
The Treasury said appointing a renminbi clearing bank was the logical next step and would support the City's efforts to expand its renminbi activities.
George Osborne, the chancellor, said: "Connecting British firms and markets to China's extraordinary expansion is a key part of our economic plan, because it brings jobs and investment to our country. Since I launched our drive to become a hub for offshore renminbi trading, the market has grown and grown and now almost two thirds of all renminbi trading outside of Mainland China and Hong Kong take place in London.
"Chinese bonds are now issued in Britain, Chinese assets are being managed here and now the first Chinese clearing bank outside Asia is opening in London."
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