As China, the world's second largest economy, promotes the use of its currency in international trade, London is competing with Luxembourg, New York, Paris and Frankfurt to become the top offshore yuan centre in the Western time zone.

London, which dominates the $5-trillion-a-day global foreign exchange market, accounts for two thirds of all renminbi payments outside China and Hong Kong, according to Britain's finance minister, George Osborne.

"Today's appointment is another major step forward for the UK as the western hub of Chinese finance," Osborne said in a statement on Wednesday.

Hong Kong remains by far the largest centre for offshore yuan deposits. Deposits in Taiwan,Singapore and Macau also dwarf those in European capitals. New York lags far behind.

Bank of England chief Mark Carney said the clearing deal would help cross-border use of renminbi (RMB).

"China Construction Bank will play a valuable role in facilitating greater use of the Renminbi for trade, investment and other economic activities in the UK, particularly by providing a further option for UK firms to clear and settle their RMB activity within the London market," Carney said.

A Treasury statement said, with the agreement of the People’s Bank of China’s there will be direct trading between the Chinese renminbi (RMB) and sterling, rather than through the US dollar.

"Trading will start straight away on the China Foreign Exchange Trade System (CFETS), facilitating the formation of a bilateral exchange rate which will lower transaction costs for UK and Chinese companies."

The news comes as the City of London Corporation’s Renminbi Business Volumes Report found that trading in London’s offshore market in deliverable renminbi products increased by over 140 percent in 2013, to reach an average daily value of $18.7bn. For the first time these products overtook non-deliverable products like derivatives, demonstrating growing liquidity in London’s renminbi markets. 

(VoR, Reuters)