UPDATE 1-Britain and China set up 3-year currency swap line

Sat Jun 22, 2013 3:11pm EDT

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* Deal is China's first swap line with a G7 country

* UK aims to boost London's role as centre for yuan trade

By David Milliken

LONDON, June 22 (Reuters) - Britain and China have agreed to set up a currency swap line, China's first such agreement with a G7 country, in a move aimed at boosting trade and financial stability, the Bank of England said on Saturday.

The Bank of England said in January that it was open to a sterling/renminbi swap line, something British financiers have been asking for in order to strengthen London's position as a centre for issuing bonds denominated in China's currency.

In an effort to achieve greater overseas use of the renminbi - also known as the yuan - China has already agreed swap lines with more than 15 other countries, mostly emerging markets.

On Saturday, Bank of England Governor Mervyn King and his counterpart at the People's Bank of China, Zhou Xiaochuan, signed an agreement to set up a three-year swap line, which will have a maximum size of 200 billion yuan ($32.6 billion).

"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," King said in a statement.

This means the Bank of England could supply yuan in exchange for other currencies if there were a sudden shortage in the London market, for example to enable a British company to pay for imports from China.

For Britain, the swap deal should also help to cement London's role as the leading centre in the Group of Seven industrialised nations for offshore trade in the yuan, in the face of competition from Frankfurt, Paris and New York.

However, Britain's yuan trade still pales in comparison with that conducted in Hong Kong.

While a handful companies such as oil major BP and banks HSBC and ANZ have issued yuan-denominated debt in London over the past year, in Hong Kong the trade has grown to around 350 billion yuan in a little over two years from 2010, according to Thomson Reuters data.

Britain already has swap lines with the U.S. Federal Reserve, the European Central Bank and the Bank of Japan, though they have been little used other than at the height of the financial crisis.

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