Australia keen to trade currency with China

by Mark Benson on July 12, 2012

in Money, Business and Finance

More business with China to boost economy

Australian Treasurer Wayne Swan will this week push the Chinese authorities for a closer relationship with regards to extended currency trading between the two countries. This comes at a time when the Chinese authorities have announced plans to significantly open up the Chinese Yuan to the outside world and therefore give the country a stronger position with regards to worldwide trade. This is a major move by the Chinese government and one which the Australian authorities are very keen to be part of in the longer term.

The old China

The old China of many years ago was a very secretive country, closed off to the outside world but an area of the world which had massive potential for major economic growth. The China we see today is very different to that of years gone by and while there is still much work to be done progress has certainly been made. As a consequence of this change in direction by the Chinese authorities there are now more Western companies operating in the country than ever before, more international trade relations and a more transparent economy even if it is not perhaps as transparent as many had hoped.

While it would be foolish to suggest that the Chinese authorities have let slip their firm grasp on the Chinese economy and the Chinese people this grasp has been loosened over the years. Whether or not the authorities will ever accommodate a Western-style of government, which is less hands-on, is unlikely but who knows what the future holds.

Free currency trade

The Chinese authorities are very keen to have up to 30% of foreign trade settled in the Chinese Yuan by 2015 which would be a threefold increase on the current rate of settlement. The idea is that the more freely available the Yuan becomes on the international stage the easier it will be for Chinese companies, and their overseas counterparts, to collaborate on international trade agreements.

It is very difficult to put a cost on the current arrangement but the recent agreement between China and Japan to start direct currency trading is estimated to save around $3 billion in annual costs simply by eliminating the middle currency of the US dollar. When you bear in mind these significant costs which are being taken on board by companies and ultimately passed on to their customers there is the potential for enormous cost savings by simply allowing overseas counterparts to trade directly using the Chinese currency.

How can Australia benefit from currency trading?

The Reserve Bank of Australia recently signed an agreement with the Chinese authorities in relation to a AU$30 billion currency swap line which will improve liquidity when trading between Australia and China. This is a vital element of the Australian economy going forward because of the ever-growing relationship with China with regards to not only the mining industry but various other elements of the Australian economy.

At this moment in time the Australian authorities, together with their New Zealand cousins, are the only Western economies to have signed such an arrangement with their Chinese counterparts. While this does put them in a very strong position going forward there is no doubt that the international money markets such as London and Singapore will take the lion’s share of Yuan trading in the future even though they have yet to come to a formal agreement. That is not to say that Australia cannot play a major role further down the line as there will be significant business up for grabs and with a very close trading relationship already in place this is almost certain to grow in due course.

Opening up the Chinese economy

As the Chinese currency becomes ever more available around the world, both with regards to international trade and domestic use, this will ultimately open up the Chinese economy to more investment and more trading arrangements with overseas counterparts. At this moment in time there are few countries which are in a stronger position than the Australian authorities and indeed this week’s address by Wayne Swan in Hong Kong is certainly well timed.

The Chinese authorities have already confirmed that the semi-autonomous city of Hong Kong will house the majority of the country’s offshore currency trading arrangements and the fact it already has very strong links with the likes of London and Singapore will be a major benefit. Hong Kong has for some time been one of the major financial centres of Asia and even though effective control of the area was passed to the Chinese authorities some years ago it is still seen by many as a reflection of the Western way of life.

Cost savings for Australian companies

The more readily available the Chinese currency becomes in international markets the more potential cost savings for the likes of Australian companies and their overseas counterparts. When you bear in mind the billions of Australian dollars which are traded on an annual basis between Australia and China even just the merest percentage cost saving can run into the millions if not billions of dollars.

When dealing on international markets, and indeed in domestic markets, every percentage saving counts because this leaves more funding to be reinvested in the longer term. It is also worth noting that there are currently billions upon billions of dollars of investment put aside for the Australian mining industry which is not expected to peak until potentially 2015. Free trading of the Chinese currency and the Australian currency will assist with this investment programme which will depend to a large extent on demand from the likes of China and India.

Conclusion

While Australia and New Zealand are the only Western economies to have signed currency swap arrangements with their Chinese counterparts to date the likes of London and Singapore will eventually enter the market and take the lion’s share. However, this week’s address by Wayne Swan to his Chinese counterparts has certainly strengthened the position of the Australian government going forward and given them the opportunity to become a major trading partner of the country.

Time and time again we see the Australian government looking further and further ahead with regards to future developments in their economy. This has paid dividends in the past and today’s move will certainly pay dividends in the future if the relationship can be developed and progressed. The potential cost savings and increased trade could be enormous and add a further string to the bow of the already buoyant Australian economy.

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