Submitted by Tyler Durden on 03/31/2013 12:46 -0400
A month ago we pointed out that as a result of Australia’s unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip.
Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world’s "reserve currency" in its trade dealings with the world’s biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process "slashing costs for thousands of business" and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar’s reserve currency status until one day it no longer is.
That said, this latest development in global currency relations should come as no surprise to those who have followed our series on China’s slow but certain internationalization of its currency over the past two years. To wit: "World’s Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", and "The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap."
And while previously the focus was on Chinese currency swap arrangements, the uniqueness of this weekend’s news is that it promotes outright convertibility of the Yuan: something China has long said would happen but many were skeptical it ever would. That is no longer the case, and with Australia setting the precedent, expect many more Asian countries (at first) to follow in Australia’s footsteps, because while the developed world is far more engaged in diluting its currency as a means to spur "growth", Asian and developing world nations are still engage in real, actual trade, where China is rapidly and aggressively becoming the world’s hub.
More from The Australian:
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 also exploring other opportunities to work with China to support the internationalisation of the RMB."
Australia’s banks increasingly arrange trade finance through Hong Kong, which has developed a special role as China’s chief international finance centre.
Needless to say, China is eagerly looking forward to taking yet another bite out of the USD’s reserve status.
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.
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.