Direct Trade between Australian Dollars and Chinese Yuan Commenced

On April 9, Australia and China reached an agreement for direct currency trade between Australian dollars and Chinese yuan, and the direct trade was launched in China's onshore foreign exchange market on April 10. Under the deal, the Australian dollar for the first time was directly convertible into Chinese yuan, without going through the US dollar, and Australian dollar is the third currency in the world that can be directly traded with Chinese yuan.

Direct trading between the two currencies will promote bilateral trade and investment between China and Australia, facilitate the use of the currencies in cross-border trade and investment settlement and lower currency conversion costs. It would make trade documents far simpler for business by cutting out the complexity of needing to convert first to US dollars and the savings to businesses could be higher than one per cent of a transaction value.

For Australia, there are two main advantages in having the Chinese yuan and Australian dollar trade directly against each other.
 
Firstly, trading in foreign exchange markets is not costless. Having a CNY/AUD market means that only one trade needs to be executed, as opposed to two. This is mainly where the cost savings are being touted for Australian businesses.
 
Secondly, the presence of a CNY/AUD market means that the CNY/AUD rate can, at least in theory, better reflect developments in the two countries, irrespective of what is happening in the US.
 
For China, the establishment of a CNY/AUD market brings other benefits, such as furthering the internationalisation of Chinese yuan; and  for customers based in mainland China, the direct trading will help them to work seamlessly between geographies, protect against FX risk, more effectively negotiate with suppliers and shore up their cash flow,
 
While the establishment of an CNY/AUD market is a positive step in view of the large volume of trade between China and Australia, excitement ought to be tempered for a number of reasons.

A lack of sophisticated hedging products and a preference for US dollars by ­Chinese businesses still stand in the way of a boom in direct exchange between the Chinese yuan and the ­Australian dollar. For Chinese importers, there may be some reluctance in the near term to be paying in yuan, but this should shift over time.  Chinese yuan appreciation expectations are being scaled back and we are likely to see more two-way risks in USD/CNY in coming years.

WESTPAC and ANZ have been granted the rights to directly trade Australian dollars and Chinese Yuan as part of an agreement to directly trade the two currencies on the Chinese mainland.  Westpac has been operating in China for about 40 years and has full branches in Shanghai and Beijing. ANZ is Australia's largest bank in China. Commonwealth Bank of Australia is also applying for a licence to be able to trade the two currencies directly and hopes to make progress on the pair in the second half of this year, subject to regulatory approval.


As Julia Gillard put it, "this is a strategic development and really does signal a deepening of relationships between China and Australia, it signals deepening of trade connections and great opportunities for future growth.”
 
For assistance to do business with China, please contact Sara Cheng,  Manager-Greater China Region, Australian Business Consulting & Solutions, Email: sara.cheng@australianbusiness.com.au