China pushing to be world's banker

March 23, 2014

Beijing (Mar 23)  China's push to make the yuan the world's reserve currency could spell a period of increased volatility for the Australian dollar even as it opens up new opportunities for local investors and businesses.

The world's second-largest economy has sped up its internationalisation of the yuan, also known as the renminbi (RMB), with the central bank, the People's Bank of China, doubling its daily trading band in mid-March.

Last week, New Zealand became the fourth currency to be directly convertible into the yuan.

''Through this internationalisation, China's going from being the world's manufacturer to the world's banker,'' said Hayden Briscoe, director of Asia-Pacific fixed income at fund manager AllianceBernstein.


''We're saying it's the biggest change in capital markets in our lifetime.''

Even so, the journey towards full convertibility for the yuan and the pursuit of reserve currency status would be full of challenges for China and its largest trading partners such as Australia, analysts said.

''I would certainly emphasise the challenges and the risks more in the short-term rather than the opportunities,'' Westpac's chief currency strategist, Robert Rennie, said, adding that the use of copper and iron ore by some firms as collateral for loans reflected the immaturity of domestic capital markets.

''I think the opportunities are something that we will only start to see once we have greater maturity in the funding, in the issuance and in the lending markets in China.''

The Chinese currency's role on the world stage has grown since the first yuan trade settlement scheme started in 2009. In December, the yuan overtook the euro to become the second most-used currency in global trade finance after the US dollar, according to data from global bank payments provider SWIFT.

It is the world's seventh most-used currency for worldwide payments and is used to settle about 18 per cent of China's total trade, British bank HSBC estimates. The bank expects the yuan, which it dubs the ''redback'', to be fully convertible within two to three years.

''The currency will soon be ready to take its place at the top table, with full convertibility the benchmark,'' HSBC's currency strategists said in a report this month. ''[I]t will help create a multiple reserve currency system in which the US dollar, the euro and the RMB all play their part.''

With more than 50 per cent of China's trade expected to be settled in yuan over the next few years, the Australian dollar-yuan currency cross is set to become more heavily used by businesses and other financial market participants, Mr Briscoe said. As such, more volatility in the yuan could see increased volatility for the Australian dollar.

The wider use of the yuan could take the pressure off the Australian dollar in its role as a risk proxy for China. But ''it also means that the correlation of where the Aussie is going will become tighter and tighter with the RMB and will have less to do with the US dollar'', Mr Briscoe said.

HSBC's analysts said China's road towards capital account liberalisation could be bumpy - as was the case with Indonesia, which was badly hit during the Asian financial crisis.

However, the size of China and its economic clout meant Australian investors and businesses had to start factoring in the role of the yuan and country's bond markets into their decision-making, Mr Briscoe said.

''They are putting their banks physically behind transactions,'' he said. ''There's a reason to deal with China because they are so big.''

 Source:  theAge


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