* London, rivals compete as offshore Chinese currency centres
* Record bond, Ashmore licence, ETFs give London a boost
* Renminbi FX trade swells in London, but bond issuance slow
* Direct retail access to China's top shares now easier
LONDON, Jan 17 (Reuters) - After a patchy two years, London appears to be making headway in its drive to become Europe's main offshore hub for trading in China's currency, potentially delivering a big boost to its financial sector and the wider British economy.
China decided late last year to give UK investors the right to buy up to 80 billion yuan ($13 billion) of mainland stocks, bonds, funds and money market instruments directly using its currency, making Britain the first country outside Asia with such status.
Last week, the state-controlled Bank of China also sold a 2.5 billion yuan ($413 million) bond in London, the biggest issued in the currency - which is also known as the renminbi (RMB) - so far in the British capital.
"It is inarguable that London is the leading offshore RMB centre in Europe and I think it will pick up this year. The trends are strong ... it (London) is building on the strengths it has," said Wenjian Fang, chief executive of Bank of China UK.
China has relaxed controls over the last five years to establish the yuan as an international currency of trade and reduce its reliance on other currencies. The yuan is expected to become a leading so-called reserve currency, meaning it will be stockpiled by central banks, and be fully convertible by 2015.
It has already overtaken the euro as the second most important currency in trade finance, accounting for about 8.7 percent of that market last year from 1.9 percent at the start of 2012, according to payments firm Swift, although it is still a long way behind the U.S. dollar's 81 percent.
For countries that secure closer financial ties with China, the rewards are potentially enormous.
Firstly, they could get access to stock and bond markets in the world's second-largest economy that are worth between $3 trillion and $5 trillion each, and expected to grow rapidly.
Secondly, analysts expect the cash will flow both ways, with China increasingly looking to put some of its $3.6 trillion in foreign exchange reserves to use and planning to give Chinese investors easier access to foreign markets via its renminbi qualified domestic institutional investor (RQDII) scheme.
"China's outbound investment is predicted to become the third biggest globally by 2017, so everyone wants to see some of that," said Rongrong Huo, HSBC's head of RMB business development in Europe.
While London's position as the world's biggest foreign exchange and bond trading centre, Europe's financial hub and the home to Asia-focused banks HSBC and Standard Chartered give it advantages, others are snapping at its heels.
Luxembourg, Paris, Frankfurt and Switzerland, among its European rivals that also want in, have strong cases. Germany and France do more trade with China than Britain, and Germany is the only one of the largest five European countries using yuan for trade finance.
GAINING AN EDGE
With Britain's financial services industry accounting for about 8 percent of gross domestic product and battling to recover from the global financial crisis, winning business from China has become particularly important for the UK government.
It stole a march on European rivals in early 2012 when - to great fanfare - finance minister George Osborne launched a working party to develop London as an offshore yuan centre.
But while yuan foreign exchange trading and trade finance grew rapidly in the first half of 2013, development of a yuan bond market has struggled, a report by Bourse Consult, released by the City of London lobby group, on Thursday showed.
Luxembourg is currently Europe's leader in yuan bonds, funds and loans, with the largest pool of Chinese currency deposits in the region and 40 yuan bonds listed on its stock exchange.
The tiny Grand Duchy is second only to Hong Kong in Chinese currency bonds with 24.5 billion yuan from the likes of Caterpillar and Volkswagen listed there.
But Luxembourg-based investors cannot directly invest in China, and China's decision late last year to give British investors the right to buy up to 80 billion yuan of mainland assets directly, using its currency, could give London an edge
That decision was part of a pilot in China to trial access to its markets called the renminbi qualified foreign institutional investor (RQFII) scheme.
Expanded to include London, Taiwan and Singapore - from the leading offshore market of Hong Kong - it is designed to help the large pools of yuan building up around the world as a result of trade to be reinvested in China.
Under the scheme, Ashmore this month became the first British asset manager to be awarded a licence to invest in mainland Chinese assets using the yuan, and two exchange-traded funds (ETF) were listed in London which track Chinese shares.
"RQFII has changed the whole landscape of how to invest," said Peng Wah Choy, CEO of Harvest Global Investments, the Chinese Hong Kong-based asset manager which partnered with Deutsche Bank on one of the ETFs listed in London.
Britain's easing of the rules for Chinese banks to set up branches in London, and the setting up of a renminbi swap line between the two countries' central banks late last year, also show political will to make the London experiment work.
But London is unlikely to have its advantage for long, with other countries also keen to take part in RQFII.
"I think there would be a bit of intense lobbying as to who would be next ... maybe the Americans or the Germans," said Brian Gordon, partner at international lawyers Holman Fenwick Willan.