Australia and China plan to trade directly in their own currencies

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PM Set to sign China Currency Deal in Boost to Exporters

By Rowan Callick
The Australian, Sydney
Saturday, March 30, 2013

http://www.theaustralian.com.au/national-affairs/foreign-affairs/pm-set-...

A currency deal enabling the Australian dollar to be converted directly into Chinese yuan, slashing costs for thousands of businesses, is set to be the centrepiece of [Prime Minister] Julia Gillard's mission to China next weekend.

Australia would become the third country, after the United States and Japan, to secure such an arrangement from China, which is Australia's top trading partner, with exports and imports totalling $120 billion last financial year.

At present, companies doing business with China must pay the added cost of converting their Australian dollars into U.S. dollars or yen and then into yuan.

... Dispatch continues below ...



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Former ambassador to China Geoff Raby, now a Beijing-based business figure, told The Weekend Australian: "The value of such a deal would be substantial for exporters to China, especially those that import a lot from China like mining companies, as it would remove business constraints including exchange-rate risks and transaction costs."

Businesses, like individuals when travelling, have to pay extra to convert currency since there are different rates for buying and selling.

So removing one step also cuts out the cost of paying for such a "spread."

Australia has undertaken significant lobbying for the deal and the direct conversion of the yuan, also referred to as the renminbi (RMB), is identified as a priority in the government's Asian century white paper.

"We have held preliminary discussions with the Chinese government to explore how soon direct convertibility can be practicably achieved," the white paper says.

"We are continuing these discussions and exploring other opportunities to work with China to support the internationalisation of the RMB."

A year ago the nation's central banks signed a deal allowing a $30 billion currency swap lasting three years, through which the Reserve Bank of Australia and the People's Bank of China make available the funds for business between the two countries via commercial banks in Australia and the state banks in China.

In addition, Australia's banks increasingly arrange trade finance through Hong Kong, which has developed a special role as China's chief international finance centre.

However, new President Xi Jinping, a former Communist Party secretary of Shanghai, is a champion of that city's development as China's finance hub, and it is believed that the prime minister may fly there to sign the currency conversion deal.

She will first attend the Boao Forum, intended as an Asian version of the World Economic Forum that is held at Davos, in Switzerland.

These Boao forums -- of which former Labor prime minister Bob Hawke was a founder and remains closely involved -- have been held annually for 11 years on subtropical Hainan Island in China's south.

It is understood that Tony Abbott had planned to attend the forum this year, but opposition foreign affairs spokeswoman Julie Bishop will now go instead.

John Howard and Kevin Rudd both attended the forums as prime minister.

Ms Gillard is expected to go on from Shanghai to Beijing, where she will open the third Australia China Economic and Trade Forum organised primarily by the Australia China Business Council, which will be bringing about 100 people from Australia for the event. Participants are likely to include Andrew Harding, Rio Tinto's new chief executive for iron ore; Warwick Smith, ANZ Bank's chairman for NSW and the ACT; Australian Trade Minister Craig Emerson and Financial Services Minister Bill Shorten; Gao Hucheng, China's Commerce Minister; and Gao Xiqing, the acting head of China Investment Corporation, the country's vast sovereign wealth fund.

The ANZ Bank has been a strong advocate of direct convertibility between the [Australian] dollar and the yuan. Gilles Plante, the bank's chief executive in Asia, said in a recent report that in the last financial year, China accounted for 29 per cent of all exports and 18 per cent of imports, but the value of that trade denominated in yuan was less than 0.3 per cent.

He forecast that cross-border flows of funds would be liberalised "to support Shanghai's plan to build itself as a global financial centre. At the time the whole world is digging out opportunities from the rise of the yuan, Australia should not lag behind."

Ms Gillard's office had no comment to make last night.

It was significant the liberalising governor of the People's Bank, Zhou Xiaochuan, kept his job during the reshuffle of China's leadership. He said last year at a conference: "The next movement related to the yuan is going to be reform of convertibility. We are moving in this direction; we need to go further, we will have some deregulation."

Beijing appears to have chosen Canberra as its partner in this next movement for straightforward economic reasons, as Australia has become China's fifth-biggest source of imports and thus, the appropriate partner for the march of its currency.

Ms Gillard and President Xi Jinping may also during the visit establish a "strategic partnership" between the countries. This will enable Australia to catch up in status with a large range of nations.

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