Deeper China ties coming with direct currency trade
Prime Minister Julia Gillard confirmed on Monday that Australia would become the third country that will be able to trade its currency directly with the yuan, or renminbi (RMB), following the US and Japan.
Westpac and ANZ are the first two banks that will be able to offer a direct conversion between the two currencies, which must now be completed in a roundabout process via the US dollar.
Commonwealth Bank is applying for a licence so it can trade the two currencies directly, and it's understood NAB is making the same move.
Jonathan Cavenagh, a Singapore-based currency strategist at Westpac, said the deal would save exporters money on transaction costs.
In the longer term, it will also give exporters more opportunity to invest in a range of yuan-denominated products as China opens up its financial system. Exporters who are paid in yuan, for instance, would have the option of investing in "dim sum bonds" - RMB-denominated products traded in Hong Kong.
"This is a continuing part of China's long road to RMB internationalisation. They are trying to encourage market participants to use RMB," Mr Cavenagh said.
"This is definitely a step in the right direction. It's a very positive development for Australia's financial sector, but it's one step on a long journey."
The deal also had the potential to benefit exporters because there was a general view that the yuan was on a long-term appreciation trend, Mr Cavenagh said.
ANZ chief executive Mike Smith said the likely saving on transaction costs would be "a few basis points".
While this saving was "not huge", it would save time, he said.
He also said a new dollar-yuan currency market worth billions of dollars would emerge to service the needs of Australian and Chinese businesses.
"That will pick up fairly quickly - if you look at how the internationalisation of the renminbi has moved in Hong Kong, it's already into the tens of billions," Mr Smith said.
Since China began to allow greater internationalisation of its currency in 2010, the share of China's trade conducted in RMB has increased from 0.5 per cent to 14 per cent, Mr Cavenagh said.
Australia's commodity trade with China, however, is now done almost exclusively in US dollars. More than 98 per cent of coal and iron ore exports were sold in US dollars last financial year.
Ms Gillard said the change would bring a long-term stimulation in Australia's financial sector.
"It's an important foundation stone for what we can achieve in the future, a future of huge opportunities and potential," she said.
Frequently Asked Questions about this Article…
Direct trade between the yuan (renminbi, RMB) and the Australian dollar means banks can convert AUD to RMB without routing transactions through the US dollar. For everyday investors, that should deepen financial links with China, make currency conversion more efficient, and support a broader range of RMB-denominated products becoming more accessible over time.
Westpac and ANZ are the first two banks able to offer direct conversion between the Australian dollar and the yuan. Commonwealth Bank is applying for a licence to do the same, and NAB is understood to be pursuing a licence as well.
Direct AUD‑RMB trades remove the need to convert via the US dollar, reducing transaction costs. Analysts quoted in the article say savings are likely to be modest—“a few basis points”—but they also save time and simplify cash flows for exporters and investors dealing with China.
Yes. As China opens its financial system, exporters and investors paid in RMB will have more options to invest directly in yuan-denominated products, such as “dim sum bonds” (RMB-denominated bonds traded in Hong Kong), expanding portfolio choices for those with China exposure.
The article notes a general view that the yuan is on a long-term appreciation trend. If the yuan strengthens over time, exporters paid in RMB could benefit by receiving more value when converting or by holding RMB-denominated assets.
Australia and China have about a $120 billion‑a‑year trade relationship. Since 2010 the share of China’s trade conducted in RMB rose from 0.5% to 14%, but Australia’s commodity exports remain almost exclusively priced in US dollars—more than 98% of coal and iron ore exports were sold in US dollars in the last financial year.
Prime Minister Julia Gillard described the move as a foundation stone that will stimulate Australia’s financial sector over the long term and create future opportunities. Industry commentators call it a positive step toward RMB internationalisation and a boost for financial services linking Australia and China.
Bank leaders expect a new dollar–yuan market to emerge fairly quickly to service Australian and Chinese business needs. ANZ’s CEO suggested it could be worth billions, pointing to how RMB internationalisation in Hong Kong already reached the tens of billions, implying strong potential growth for an AUD–RMB market.
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