Australia announces $31 billion currency swap with China

by Mark Benson on March 22, 2012

in Money, Business and Finance

Australia knocking on the door of the Dragon

The Australian authorities have today announced a $31 billion currency swap agreement with China which will further internationalise the Chinese renminbi on the worldwide trading stage. Even though Beijing currently has around 20 other such currency swap arrangements in place the Australian deal is by far and away the largest and most prominent. So why is the Australian government looking to jump into bed with the Chinese authorities?

The Australian economy

It is no secret that the Australian economy has been powered over the last few years by the natural resources industry and it is also no secret that China has taken just over 25% of all natural resources and energy exports. This is a massive amount of money and a massive dependence with regards to the Australian economy and the Australian mining industry. As a consequence, the $31 billion currency swap will further strengthen ties between the two countries and should help to initiate further trade in the future.

The trade arrangement is very much beneficial for all parties because the Chinese authorities have the opportunity to “internationalise” their local currency while Australian miners and energy companies have the opportunity to further strengthen their export contacts. At a time when the Australian economy is starting to show slight signs of a slowdown it will be interesting to see how this deal is welcomed on Australian stock markets.

Why is there a need for a currency swap arrangement?

There is no formal need for a currency swap arrangement with any country, and historically they have been put in place to prop up ailing economies, but this particular situation is very different. Despite the fact that China is one of the largest and strongest economies in the world the local currency is kept under tight control and outflow from China is very limited. This is not the type of situation you would expect and you would hope for in a country which is growing and importing/exporting on the international stage.

The swap arrangement will effectively support trade and investment between Australia and China, not necessarily by Chinese authorities also by Australian authorities, and many believe further trade arrangements will be announced in due course. There is no doubt that Australia has many resources which China would like to get its hands on although demand from other countries around the world such as India is also a significant consideration. There is no need for the Indian authorities to put in place such a swap arrangement because the local Indian currency is very liquid and very easy to trade on the worldwide markets.

It is believed, and we need to bear in mind the secrecy of the Chinese authorities, that around 1.5 trillion in renminbi currency swaps are currently in place. This is a massive trading arrangement and one which under normal circumstances would see exposure of the Chinese currency maximised. However, in many ways the Chinese authorities are proving to be something of a hurdle and many experts believe that a slackening of the purse strings and currency restrictions will be required in order for China to be fully accepted on the international trading stage.

Are further deals in the offing?

No sooner has the Australian and Chinese currency swap been put to bed than speculation begins to grow that the Bank of England and the Bank of Japan could be the next two major financial institutions on the Chinese government’s hit list. Whether the expected transactions will be anywhere near the size of the Australian deal remains to be seen but the Chinese authorities appear determined to spread the word about their local currency and reduce the very narrow restrictions which have held the currency back. Increased settlement of import/export transactions using the Chinese renminbi will be a major step forward for a country which has in many ways enjoyed the secrecy and the mystery of years gone by.

Will the relationship between China and Australia blossom?

The expat market is one which is built upon trust and reliability and the stronger the relationship between the Chinese authorities and the Australian authorities the more chance that expats will jump between the two countries. It is also highly likely that further investment and business opportunities will arise on both sides of the trading line to the benefit of all parties involved. While the currency swap is not necessarily a dealmaker in itself it does very much lay the groundwork for a very interesting relationship going forward.

The worldwide profile of the Australian economy will improve on the back of this deal and the exposure gained by the Chinese currency will certainly be of benefit. Yet again we have seen the natural resources industry opening more doors and closing more deals for the Australian authorities than anybody could ever have expected. When you consider the fact that many people expect the mining boom to continue for at least the next decade, Australia could well become one of the economic powerhouses of the world.

International investment

International investment is also likely to benefit, that is non-Chinese international investment, as more and more opportunities arise for Australian companies to break into the Chinese market. This is likely to attract private investor money and business funds into the country as a means of gaining access to the very lucrative and enormous Chinese market. This is a market which has for many years evaded even the most astute of business people yet it is one which is very much at the top of the business “want list”.

Slowly but surely the Australian authorities are positioning the Australian economy in a potentially lucrative area of the worldwide trading arena. The country already has significant exposure to India and the currency swap arrangement has further strengthened ties with the Chinese authorities. There is some negative comment regarding the recently announced mining tax but such is the profitability in the natural resources industry at the moment that this may well fade in time.

You could debate whether the Chinese government or the Australian government has received more from the swap deal when in reality both parties have got what they wanted. Exposure to the rest of the world!

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