Britain is holding talks with China to designate a London clearing bank for the yuan as it tries to become the world's leading centre for trading the currency, Chancellor George Osborne said Thursday.
China's currency, also called the renminbi (RMB), is not freely convertible. But the Chinese government is gradually moving towards full convertibility so that the unit might one day rival the US dollar.
Speaking to the British Chamber of Commerce in Hong Kong, the British finance minister said London had become the centre of yuan trading in the West.
"Ultimately, what we all want to see is RMB being used more and more as a currency of choice in the world," said Osborne.
"So I can tell you today that the UK and Chinese governments are in active discussions about the appointment of a RMB clearing bank in London," he said, according to a text of his speech.
The move would make RMB transactions in the financial centre more efficient and quicker.
Hong Kong, the former British colony which is now a special administrative region of China, is now the largest centre for offshore trading of the yuan.
In April last year the City of London financial district launched an initiative to make the British capital a centre for yuan business.
The central banks of the two countries also agreed last June to set up a sterling-yuan currency swap line to promote bilateral trade.
Osborne said more British retailers, including John Lewis stores, would start accepting payment in yuan to encourage buying by Chinese tourists.
One of China's largest fund management firms, E Fund Management, and London-based ETF Securities also planned to launch a financial product to allow foreigners to invest in Chinese firms directly in yuan, he said.
China keeps a tight grip on the capital account -- investment and financial transactions, rather than those related to trade -- due to worries that unpredictable inflows or outflows could harm its economy and reduce its control.
Convertibility of the yuan -- allowing the currency to be freely bought and sold, and with it the movement of funds into and out of China -- is the main obstacle preventing China's financial capital Shanghai from competing with global centres such as New York and London.
Osborne heaped praise on China's promised financial reforms, including allowing the free market to play a greater role and setting up free trade zones. China set up an FTZ in Shanghai last year but foreign companies have been disappointed with the initial changes.
"I am confident that when these reforms are implemented they will not just make China more resilient, but make the whole global economy more resilient," he said.
Osborne, who is on his way to the Group of 20 ministerial meeting in Australia, said the global picture was improving but worries remained.
"The risks to economic recovery have not gone away. Together we need to act now to ensure that emerging market problems don't contribute to a new crisis," he said.