China opens Aussie dollar direct trading

Move is latest in internationalisation of renminbi

Direct currency trading between the Australian dollar and the renminbi will begin this week, Julia Gillard, Australian prime minister, said on Monday.

The Australian dollar will become only the third currency to trade directly with the Chinese currency, alongside the US dollar and the Japanese yen, after ANZ and Westpac were given trading clearance by the Chinese central bank.

“This will be a huge advantage for Australia, not only for our big businesses but also for our small and medium enterprises that want to do business here,” Ms Gillard told reporters during a visit to Shanghai.

China and Australia established a currency swap agreement in March 2012. At Rmb200bn (US$2bn), it is China’s third-biggest such facility after those of Hong Kong and South Korea.

China is Australia’s biggest trading partner and buys more than a quarter of the country’s exports, mainly in the form of natural resources including coal and iron ore.

Australia is the fifth-biggest source of goods bound for China, responsible for almost 5 per cent of China’s total imports in 2011-12, according to Australia’s department of trade.

Only a small slice of China’s trade in goods is settled in renminbi, although Deutsche Bank forecasts that will rise to about 15 per cent by the end of this year.

While the direct currency channel should lower costs for companies, analysts said it was unlikely to have a major impact in the near term.

“We do not expect a lot of FX trading volumes as most flows are still settled in the US dollar, but the announcement represents an important move in collaboration between the two countries and in the development of offshore markets,” Dariusz Kowalczyk, strategist at Crédit Agricole, wrote in a note to clients. “It is also another small step in reducing the global role of the US dollar and boosting the role of the renminbi.”

China set up direct trading in yen in the middle of last year, but the scheme got off to a sluggish start in part due to a territorial dispute that prompted a rapid drop in Chinese imports of Japanese goods.

Jonathan Cavenagh, FX strategist at Westpac, said that a move to price more natural resources in the Chinese currency would be key to developing the Australian trading link.

“Once China pushes towards pricing commodities more in renminbi terms, that is when this type of scheme really comes into its own,” he said. “That’s something that China is obviously going to be pushing for in the period ahead.”

China this year has already taken a number of steps to further the internationalisation of its currency. Taiwan and Singapore have both become offshore trading centres with direct clearing in renminbi, while Brazil has established a currency swap agreement with the mainland. The UK is expected to follow suit soon with its own swap facility.

China has already built indirect renminbi trading links in a number of other currencies including the Malaysian ringgit, the Russian rouble and the Canadian dollar, which are calculated via the relevant US dollar rate.

Additional reporting by Neil Hume in Sydney

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