Direct trading of the Australian Dollar (AUD) and the Chinese Yuan Renminbi (CNY) commenced on 10 April 2013, pursuant to an agreement between the Australian Government and the People's Bank of China. As only the third currency allowed to directly trade with the CNY, this development signifies a deepening of the Australia-China relationship and will reduce costs of trade between the two countries. It also reflects a push by the Chinese Government to increase the amount of its foreign trade settled in CNY which could see the CNY become the dominant currency in Asia in the future.

Background

China is Australia's largest trading partner and is the destination for nearly a third of Australian exports. Australia ranks as the fifth largest source of imports into China. The value of trade between the two nations is worth over AUD 125 billion a year and, unlike other economies, the trading relationship is quite complementary with Australia importing over AUD 40 billion of Chinese products and services.

In the absence of direct currency trade between AUD and CNY, trade between Australian and Chinese businesses has ordinarily been settled by exchange through the USD as an intermediary. As additional currency conversions were required, transaction costs increased accordingly.

Direct Currency Trading Agreement

On 9 April 2013, Australia's Prime Minister announced a direct currency trading agreement with the People's Bank of China to launch direct trading between the AUD and the CNY. The United States Dollar and the Japanese Yen are the only two other currencies in the world which can be directly traded with the CNY.

Facilitating currency exchange between the CNY and AUD has been an important goal to further strengthen Australia's economic relationship with China.  The direct currency trading agreement is an advancement of the AUD 30 billion currency swap agreement entered into by the Reserve Bank of Australia and the People's Bank of China in March 2012.

Two Australian banks have already been given clearance by the Chinese central bank to make the market for the direct currency transfer and trading commenced on 10 April.

Implications

The direct currency trading agreement is not expected to have a major impact in the near term, with only 1% of trade contracts between Australia and China currently settled in CNY. However, the agreement is likely to promote future trade transactions to be settled in CNY and the ability to directly transfer between AUD and CNY will reduce transaction and hedging costs associated with additional currency transfers for Australian and Chinese businesses.

Consideration of these factors may be necessary at the negotiation and drafting stage of contracts for the sale of goods or services between Australian and Chinese businesses going forward.

The mechanism created through this agreement will also support the rise of the CNY as a dominant currency in the Asian region. Since 2010, the percentage of international trade transactions settling in CNY has risen from 2% to 12% and the Chinese Government has set a target of 30% by 2015.

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