China Inks $31 Billion Currency Swap Deal With Australia

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China’s central bank, the People’s Bank of China, signed a $31 billion currency swap agreement with their Australian counterparts on Thursday, as the Chinese government continues its push to establish the yuan as a global reserve currency.

Under the terms of the agreement, businesses from both countries would able to settle trade terms in their respective local currency, significantly reducing the cost of trade across borders.

“The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial co-operation,” said a statement by the Reserve Bank of Australia, as cited by the Financial Times.

There will also be “increasing opportunities available to settle trade between the two countries in Chinese renminbi and to make renminbi-denominated investments,” added the Australian central bank in its statement.

In the last four years, Beijing has signed close to 20 bilateral currency swap agreements, worth 1.5 trillion yuan ($238 billion), in order to support trade and investment opportunities. At the same time, the Chinese government hopes that the deals would assist in the internationalisation of the renminbi.

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However, most of the agreements thus far have been largely symbolic, with Hong Kong the only nation thus far to activate its swap with China in 2010, albeit briefly, when it faced a renminbi squeeze.

Still, the symbolic steps could eventually lead to something bigger, said Shen Jianguang, an economist with Mizuho Securities in Hong Kong.

“It’s quite significant. They haven’t had agreements with such advanced economies. This will gain momentum,” he said.

Some Australian companies have also already begun settling trade in the Chinese currency. In 2011, Fortescue Metals Group made its first yuan-denominated transaction in China when it bought supplies in yuan using one of its Chinese accounts.

The Australia & New Zealand Banking Group also intends to double its network in China within the coming decade, said its Asia Chief Executive Gilles Plante during an interview with MarketWatch.

According to most analysts, Australia’s close economic ties with China ensured that China could tie up one of the largest economies in the world into using the yuan.

China is Australia’s largest trading partner, with total two-way trade valued around $106 billion last year. The two countries are also in the process of negotiating a free-trade pact.

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The currency swap agreement is a “sensible and logical” progression of China’s relationship with Australia, said Andrew Skinner, head of global trade and receivables finance at HSBC Australia.

 

“It’s a big step forward in formalising the internationalisation of the renminbi. It will help a lot of people get more comfortable using the currency knowing that these sorts of arrangements are in place.”