Australia backs cross-border settlements

16:10, May 31, 2011      

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Australia is keen to play a bigger part in accelerating the internationalization of the yuan, according to a new report.

By encouraging the establishment of a reciprocal currency arrangement to support trade settlements in yuan, the Australian financial sector is calling for more opportunities to share growth with the growing use of yuan in offshore trade.

This is among the key recommendations of the first Issue Paper of Australian Financial Service Business in China, which is compiled by the Australian Chambers of Commerce (AustCham) in Beijing and Shanghai.

The Australian Trade Minister Craig Emerson, who launched the paper in Shanghai on Monday, said his country is thrilled by the current commercial relationship between Australia and China, and the paper aims to create a platform for communication.

The report also suggested the Australian Treasury, the Reserve Bank of Australia (RBA) - the nation's central bank - and its counterpart the People's Bank of China (PBOC) should explore the possibility of the RBA adding yuan assets to its reserve holdings, through the purchase of sovereign yuan bonds.

David Olsson, one of the chairmen of the AustCham financial working groups, said these recommendations would help accelerate the pace of yuan internationalization and provide greater opportunities for businesses in the two countries to expand their trading activities.

"China is encouraging the use of yuan trade settlements, and the development of Hong Kong for the development of yuan-denominated products. We are eager to be part of the process to smooth our trade relations," Olsson said.

China is Australia's largest trading partner. In 2010, the volume of bilateral trade reached $88 billion.

Australia and New Zealand Banking Group Ltd, one of the country's leading banks, established a participation agreement this year with Bank of China Ltd in Hong Kong to fulfill the necessary prerequisites for currency conversion with the PBOC.

Other Australian institutions are also looking closely at putting these operational arrangements in place, Olsson noted.

"Once that occurs, there will be no operational barriers to our companies paying for services or goods in yuan. Actually we have started to see a few Australian companies using the yuan this year," he said.

However, given that China currently allows a certain quota for offshore yuan trades, the suggested swap line would give banks in Australia more confidence that liquidity will be available for the yuan on the market, the report said.

A currency swap is an agreement under which two parties exchange specific amounts of their currencies as well as a series of interest payments. Such swaps have durations of between one and five years because they are designed to hedge against interest-rate risks in foreign currency-denominated bonds and loans.

Olsson said these steps may help companies from both countries to better hedge currency risks and pave the way for a more convertible currency that could eventually be used as a store of value, particularly within the Asia-Pacific region.

China decided in June 2010 to expand a pilot program that enables onshore importers and exporters in 20 provinces to invoice their cross-border trades in yuan. At present about 70,000 companies are taking advantage of the move.

Total cross-border yuan transactions hit $58.7 billion in 2010, 13 times higher than the previous year, China's State Administration of Foreign Exchange said in April.

Last week, a report from Deutsche Bank said that daily offshore trading in yuan exceeded $1 billion in May for the first time.

Michael Wadley, partner and head of Blake Dawson China, an Australian law firm, said there is huge demand for offshore yuan trading in Australia.

"Given the existing and strong bilateral trade ties, anything that facilitates trade or speeds up the process would be sought after," Wadley said.

The biggest possible breakthrough, according to Olsson, would be if Australian mining companies, which export coal and iron ore, use yuan in future trading, so that "it will send a strong signal to the market that this is the right thing to do", Wadley said.

Source: China Daily
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