Chancellor George Osborne wants London to become a western hub for renminbi tradingReuters

Britain and China are in talks to establish London's first ever renminbi clearing bank.

The discussions were unveiled by Chancellor George Osborne in a Hong Kong speech to business leaders.

It is the latest step in establishing the City of London as a western hub for offshore trading of the Chinese currency, which is also known as yuan.

Both countries have already agreed to allow the Chinese state-owned Industrial and Commercial Bank of China (ICBC) to issue renminbi bonds in London.

Osborne also said the UK would host the first International RMB Conference in London during the summer, sponsored by banking giants such as HSBC and JPMorgan.

"Ultimately what we all want to see is RMB being used more and more as a currency of choice in the world," Osborne said.

"These steps will bring the UK and China closer together, and promote trade and commerce."

That the UK and China have gone public about the discussions will be seen as a good sign. A Treasury source said the discussions were "progressing well".

China is gradually liberalising its economy and opening up to the rest of the world. It is expected to overtake the US as the largest economy on the planet soon, potentially by the end of the decade.

The UK has China in its sights as a lucrative commercial partner. A recent trade trip by Prime Minister David Cameron secured £5.6bn worth of deals between Chinese and British firms.

A renminbi clearing bank in London has the potential to open up significantly more trading in the currency by making it easier for those outside of Asia, particularly European businesses.

Clearing banks in Hong Kong are currently most often used by western firms transacting in renminbi.