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Deal on Direct RMB-AUD Exchange to Boost Global Role of Chinese Currency

In a landmark move on Monday, China and Australia agreed to exchange directly Chinese Renminbi (CNY) and Australian Dollars (AUD), with the deal expected to foster the role of the Chinese currency in the global market. 

Not a Surprise

The agreement was not a surprise to many as China Foreign Exchange Trade System, a unit of the People's Bank of China (PBoC), had been running a test of the direct trading of AUD and CNY in its system for several weeks before the deal announcement. Moreover, Australia and China already have a RMB 200 billion ($32 billion) currency swap agreement in force since March 2012. 

Steps to Implement the Direct Exchange

After an official agreement was in place, there was something missing: although as early as in November 2011 China set a CNY/AUD exchange rate for its onshore currency market, trading of this pair has mostly been conducted through the U.S. currency because of the lack of market makers, so the two countries had to create some.
And they have. Australia's leading banks WESTPAC and ANZ have been granted market maker status by China's central bank earlier this week. 
The last step is for the direct change to kick off and a large and liquid market to develop but this may take a while.

Implications from the Agreement

For starters, the AUD becomes the third currency, after the US Dollar and the Japanese Yen that will be directly converted into RMB. Note please that the CNY/JPY exchange has had a rough start, as in the autumn of 2012 a sharp drop in the imports of Japanese goods to China and a territorial conflict over islands in the East China Sea soured the bilateral trade. Let's hope that the Australian-Chinese deal will have a happier fate.
The major consequences of the deal remain yet to be seen, as the bulk of Australian-Chinese trade is currently settled in USD, while less than 1% is settled in CNY. However, the latter percentage is set to grow quickly once the direct trade begins, as China is a key trading partner for Australia and Australian companies will enjoy lower transaction costs if they conduct their trade transactions in Renminbi instead of USD.
Most importantly, the deal is set to boost the role of the Chinese currency on the global market, adding weight to Beijing's efforts to make the RMB the third largest global reserve currency, alongside the US Dollar and the Euro. The Renminbi has already replaced the Russian Ruble at the 13th place of the world payments currency ranking, according to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) released in February. 
Forecasts point to a much bigger role of the Chinese currency on the global forex stage: by 2015 the Renminbi is expected to be the third most actively traded currency across the globe, staying behind the US Dollar and the Euro only. Moreover, one third of the transactions are set to be settled in CNY by that time. 
The Chinese yuan, however, will hardly achieve this aim if it does not free float and a recent statement by Charles Li, Chief Executive of Hong Kong Exchanges & Clearing Ltd (HKEx) said that this will likely happen within five years.

Restrictions Remain 

Although the Chinese currency is obviously set for a global rise, given the deal with Australia and the numerous (at least 20) currency swap agreements between PBoC and other central banks, be careful that there are a number of restrictions when it comes to forex trading of the Yuan. The currency is available for trading with a restricted number of brokers, such as, OANDA, Saxo Bank, FXDD, and GFT Markets.
TAGS: china  australia  forex trading  forex brokers  yuan  renminbi  australian dollar  direct exchange  free float  transaction costs 

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