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G’day China! – AUD and CNY to embark on a closer relationship.

Reports today indicate that Australia intends to further develop its economic relationship with China – currently its most prominent trading partner. Next week Treasurer Wayne Swan will be heading to Hong Kong to help lead a conference in which the internationalization of the CNY will be the main topic under discussion. Towards the week’s close Mr. Swan will engage in direct talks with Chinese officials in Beijing with the intent of progressing a deal which will make the AUD the third directly convertible currency with the CNY – behind the USD and JPY.  Direct conversion would significantly reduce import and export costs, through avoiding the necessity of intermediary currency conversion.

Such a strategy is welcomed by China as it would enable a reduction in their dependence on the USD as a reserve currency, whilst bankers say that it could encourage a greater level of Chinese investment in Australia’s resources industry.

Mr Swan stated that “Internationalization of the yuan is clearly in the interests of Australian businesses and the broader Australian economy, which is why we’ve been taking action to promote and deepen the market in yuan/Australian dollar transactions.” Further to this, Li-Gang Liu, the Head of Greater China Economics at Australia & New Zealand Banking Group Ltd, has claimed that the AUD is a “natural” currency pairing with the CNY due to the close nature of their trading ties.

Since becoming the world’s largest economy after the U.S China has been making steady progress in liberalizing the yuan. Such liberalization could potentially see 10% of commerce between Australia and China settled in yuan within two years with the offshore yuan market doubling in size. By 2015 Beijing has hopes that 30% of foreign trade will be settled in yuan, compared to the current level of 10%.