A$-RMB deal points way on international trade, says Stratton Street’s Andy Seaman
Andy Seaman, partner and portfolio manager at Stratton Street says the recently concluded deal between Australia and China over currency convertibility points the way on international trade developments.
On Monday China and Australia agreed a deal to directly trade the Australian dollar and the renminbi. This means that rather than foreign exchange between the two countries going via US dollars, the currencies can be directly converted, something that previously was only possible with the dollar and the yen.
Initially the impact is likely to be limited as most of of Australian-Chinese trade is settled in US dollars (estimates suggest that less than 1% is settled in renminbi currently). However, the longer term implications should be very supportive for Australian companies that wish to lower transaction costs by settling trade in renminbi rather than US dollars. It is also another step towards further internationalisation of the renminbi.
Globally, 12% of China’s trade is now settled in renminbi and this is expected to reach a third of all trade by 2015. If recent initiatives are able to boost trade in renminbi to match either the current (12%) level of trade settled in renminbi seen other parts of the world, or approach the one third level within a few years, then this would represent a sizeable change, which can only be positive for Australia.
China is Australia’s largest export market accounting for just under a third of Australia’s exports so there is clearly a strong incentive for Gillard’s government to develop strong relations with Beijing. However, as part of it’s aims to internationalise the renminbi, the Chinese authorities are actively courting governments and central banks around the world, so while this deal is a major talking point in Australia, it is just one part of the greater goal to internationalise the renminbi.
By 2015 the renminbi is likely to be the world’s third largest most actively traded currencies in the world, behind the US dollar and the euro with estimated trading volume of around $1trn per day.
If correct this would exceed the projected daily trading volume of the Australian dollar, sterling and Singapore dollar combined. This is more a story about the rapidly growing importance of the renminbi in global financial markets of which Australia plays an important, but small part, than it is a story about Australia.