Sir Mervyn met with Governor Zhou Xiaochuan in China
The Bank of England is in negotiations with its Chinese counterpart on a deal likely to boost trade between the UK and China in the yuan.
The Bank and the People’s Bank of China are close to signing a three-year currency swap arrangement, governor Sir Mervyn King said.
The UK is looking to become a centre for the Chinese currency, also known as the renminbi.
Chancellor George Osborne welcomed the agreement as an “important step”.
Such agreements allow central banks to swap currencies and can be used by firms to settle trade in local currencies rather than in US dollars, as happens now, since China’s currency is not fully convertible to other currencies.
Mr Osborne added that it “cements London as the Western hub for the fast-growing renminbi market”.
UK banks hold 35bn yuan ($5.5bn; £3.5bn) worth of deposits in the Chinese currency,
Last year, the UK Treasury announced plans to make London – the world’s largest currency trading hub – the leading international centre for trading the yuan outside mainland China and Hong Kong.
“London is growing rapidly as a centre for renminbi business,” Sir Mervyn said on his visit to China.
“In the unlikely event that a generalised shortage of offshore renminbi liquidity emerges, the Bank will have the capability to provide renminbi liquidity to eligible institutions in the UK,” he said.
China has been gradually relaxing strict controls on the value of its currency and on flows of capital.
Beijing has been using these pacts as part of its push for a more global role for the yuan.
It has a swap agreement with Brazil worth $30bn and has also signed similar agreements with other trading partners such as Japan, Australia and Hong Kong.