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Longer-term benefits expected from Chinese currency deal

Beef Central, 09/04/2013

A direct currency deal to be signed between Australia and China today is expected to provide longer term benefits for Australian meat exporters as liquidity in the new market is achieved.

The new agreement will allow the Australian dollar to be converted directly Chinese yuan, also known as renminbi.

Australia is the third country after the US and Japan to secure a direct currency agreement with China.

Australian businesses dealing with China have to pay the added cost of converting Australian dollars into US dollars or yen and then into yuan/renminbi.

The new arrangement means that the Australian dollar can now be converted directly into yuan in one trade, which should translate into cost savings for Australian businesses trading with the country.

Writing on the Conversation, University of Queensland senior economics lecturer James Laurenceson said that while the establishment of a RMB/AUD market was a positive step in view of the large volume of trade between China and Australia, there were a number of reasons to temper the excitement.

First, the existing costs of doing business with China were not particularly onerous on business, because the RMB/USD and USD/AUD markets were highly liquid, and fluctuations in the US/AUD rate can be readily hedged against.

In contrast, liquidity would be an issue for the new RMB/$AUD market, at least initially.

“This is where currency swap agreements such as the one signed last year between the Reserve Bank of Australia and the People’s Bank of China may turn out to be important, because they can be drawn up to provide additional liquidity if needed.”

Mr Laurenceson said the renminbi is already convertible for trade transactions and is readily available to businesses for such purposes.

He added that it was unlikely the RMB/AUD rate would float freely: “the Chinese government intervention in the RMB/$USD market is well known, and there have also been reports that fluctuations in the RMB/Yen rate are the subject of restrictions.”

Under the new agreement to be signed by prime minister Julia Gillard today, the two currencies will be able to be directly traded through approved channels from Wednesday.

The People’s Bank of China has initially approved Westpac and ANZ to act as “market makers” for the currency trading.

China has become an increasingly important market for Australian beef and veal in recent months, with exports to the market in the first quarter of 2013 outpacing sales to Australia’s third largest market of Korea.

Meat and Livestock Australia expects the positive growth to continue throughout the remainder of 2013, underpinned by a combination of tight domestic supply, increased foodservice demand and improving supply chains.

While the convertibility deal could provide benefits longer term, it was likely to have a limited short-term impact on Australian meat exports, sources told Beef Central this morning.

“I think in the short term trade will continue in $US currency because the liquidity of the yuan will be restricted,” one prominent exporter said.  

This was also because the yuan was a “controlled” currency, with a 1.0pc variation limit to the USD, rather than free floating.

As a result the initial benefits would be minimal to those exporters selling in $US.     

“In the longer term as the yuan is traded against a large range of global currencies the benefits will become greater, particularly if the shackle to the USD is removed.”

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