Australia Wants Less Dependence on Dollar

July 6, 2012 at 10:14

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Australia will step up its campaign to boost economic ties with its largest trading partner China when Treasurer Wayne Swan heads to Beijing next week hoping to secure a deal to make the Australian dollar the third currency to be directly convertible with the yuan.

Mr. Swan will lead a forum in Hong Kong on Wednesday on the internationalization of the yuan — a strategy pursued by China to ease away from dependence on the U.S. dollar as a reserve currency — before heading to Beijing for more direct discussions with officials.

“Internationalization of the yuan is clearly in the interests of Australian businesses and the broader Australian economy, which is why we’ve been taking action to promote and deepen the market in yuan/Australian dollar transactions,” Mr. Swan said.

Last month China surprised markets by making the Japanese yen the second directly convertible currency behind the U.S. dollar. Direct conversion would slash costs for importers and exporters dealing with China by avoiding the added burden of converting through an intermediary currency.

China has been moving in a steady trajectory to liberalize the yuan as it has grown to become the world’s second-largest economy after the U.S.

Beijing aims to have 30% of foreign trade settled in yuan by 2015, a threefold increase from current levels, and has been working to establish international trading hubs beyond Hong Kong to increase global liquidity in its currency.

The Reserve Bank of Australia and the People’s Bank of China signed a 30-billion Australian dollar (US$30.1 billion) currency swap line in March in a bid to support liquidity in Australian dollar/yuan trades — the only Western economy along with New Zealand to have done so — but until now Australia has lagged behind London and Singapore in the race to become an international yuan trading center.

Bankers say it could also encourage more Chinese investment in Australia’s resources industry. China is Australia’s largest trading partner, accounting for about 60% of its exports, largely raw materials such as iron ore and coal. Trade between the two countries reached an eight-month high of A$11.1 billion in May, according to government statistics.

The Australian dollar is a “natural” candidate to be paired with the yuan due to the countries’ close trading ties, said Li-Gang Liu, head of Greater China Economics at Australia & New Zealand Banking Group Ltd. Such a liberalization could see 10% of commerce between Australia and China settled in yuan within two years as the offshore yuan market doubles in size, he added.

Some Australian companies already have begun settling trade in yuan. Last year Fortescue Metals Group Ltd. made its first yuan-denominated transaction in China in a step toward settling iron-ore contracts in the local currency. HSBC Holdings estimates that only 7% of Australian businesses are ready to use the yuan to settle trades, compared with 48% of their Chinese counterparts.

Mr. Liu said the technical architecture is in place to allow Australia’s major cities, Sydney and Melbourne, to become hubs for trading the yuan should Beijing further relax controls on the Chinese currency.

“If you were to see the Australian dollar and Renminbi (yuan) quoted in the near future, [importers and exporters’] willingness to use their own currency to settle trade will increase a lot,” he said. “This kind of development hinges on market development.”