Bank of England About To Sign Currency Swap Agreement with China
February 24, 2013 • 9:30AM

The Bank of England is about to sign a three- year currency swap agreement with China, which could be finalized over the Feb. 23-24 weekend since BOE Governor Sir Mervyn King is in China, where he has met with People's Bank of China Governor Zhou Xiaochuan. This move is extremely significant, since this is the first such Chinese agreement with any major country and would help London to become a global trading center for the yuan.

Currently the yuan is not convertible, because China refuses to allow it to become a target of currency speculators and destabilization of its economy. Up until now China has signed such agreements with less developed economies to facilitate trade that might otherwise have to take place in dollars or other so-called reserve currencies. During his visit to China, according to a report in today's Guardian, King said "In the unlikely event that a generalized shortage of offshore yuan liquidity emerges, the bank will have the capability to provide yuan liquidity to eligible institutions in the U.K."

The move positions London to play a key role in Chinese trade as well as foreign investment in China. The fact that it is being done with London, which is already the world's largest international foreign exchange and bond trading center, could have far greater implications than simply promoting bilateral trade.