By Mark Kleinman, City Editor
George Osborne is closing in on a landmark deal that would see the City become one of the world's most important offshore centres for trading the Chinese currency.
Sky News understands that the Government hopes to announce by the end of the month the establishment of a London-based clearing bank that would act as a hub for offshore renminbi (RMB) payments.
The move would be significant because of the rapid growth in the volume of international RMB transactions as China's financial system and economy have become less insular.
The Chancellor has made it clear that increasing the City's share of trading in the China's currency represents a vital growth opportunity.
A London-based institution would effectively "oil the wheels" of the clearing process, reducing transaction and settlement costs, a source said.
A number of the country's vast state-owned lenders, including Bank of China and Industrial and Commercial Bank of China, have been vying to be appointed as Beijing's clearing bank in London, according to insiders.
A decision about the chosen institution could be made public within days.
The Treasury is understood to have been hoping to get a deal wrapped up in time for Wednesday's Budget statement, although that was now unlikely, a City source said.
In a speech in Hong Kong last month, Mr Osborne said the UK and China had an economic "two-way relationship of equals".
"Gone are the days when the British finance minister was only interested in securing greater market access to China.
"Now almost two thirds of all RMB payments outside of China and Hong Kong take place in London," he said.
The Chancellor said he was unashamed about having secured agreements establishing a swap line with China's central bank and allowing Chinese banks to apply to set up UK-based wholesale branches.
"Now London firms are able to invest directly in Chinese stocks and shares in RMB - something that's just not currently possible anywhere else in the West - thanks to our agreement with the Chinese Government last year.
"Ultimately what we all want to see is RMB being used more and more as a currency of choice in the world.
"The UK and Chinese Governments are in active discussions about the appointment of a renminbi clearing bank in London."
City sources cautioned that the Prudential Regulation Authority (PRA), the banking oversight arm of the Bank of England, would also need to approve any deal.
The PRA is leading the consultation on rule changes that would mean Chinese banks operating in the UK as branches rather than subsidiaries, effectively entailing lighter-touch regulation by the UK authorities.
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