The announcement came after Chinese Vice Premier Li Keqiang met with UK chancellor George Osborne at a summit in London to discuss economic ties between the two countries.
With the euro in turmoil, the dollar weakening and the Chinese pushing to internationalize the yuan, London will be keen to get an early lead in the offshore yuan trade to secure its position as a center for the global foreign exchange market.
While unlikely to overtake Hong Kong in the short term due the to Chinese government support for the special administrative region, London will have the advantage of being more attractive to global investors due to its distance from Chinese authorities.
So far, China has been focusing its yuan internationalization campaign on Hong Kong, where most offshore yuan transactions take place.
Renminbi deposits in Hong Kong totaled over 572 billion yuan in July. According to the Hong Kong Monetary Authority, the percentage of Chinese trade settled in renminbi there rose from 0.7 percent in the first half of 2010 to 7 percent in the first half of 2011.
However, according to interviews with bankers conducted by the Financial Times, a large proportion of this was due to Chinese companies dealing with their own offshore subsidiaries. Foreign companies still overwhelmingly prefer to use the dollar.
The Chinese central bank also has yuan-swap agreements with other countries, including Singapore and Nigeria.
Companies raised 54 billion yuan from the offshore renminbi market in the year to the end of August, according to Dealogic, up from 34 billion yuan for the whole of 2010, the Financial Times reported.
"Internationalizing the yuan brings with it a host of financial and political benefits. Notably, it allows China to build up claims on the rest of the world in yuan rather than increasing exposure to foreign currencies, especially a dollar that it distrusts," said Alan Wheatley, China Economics Editor at Reuters. He raised the possibility that the yuan could overtake the dollar as the world's principal reserve currency as soon as in the next decade, based on a prediction by Arvind Subramanian, a senior fellow at US think tank the Peterson Institute for International Economics.
