China may soon allow its currency to start direct trading with the Australian dollar in the country, bypassing the U.S. dollar when exchanging the units, to take advantage of growing financial and trading ties between the two nations.
The planned move, which is aimed at reducing transaction costs and boosting liquidity for the exchange rate, is also part of Beijing's long-term effort to promote the Yuan's status as an increasingly popular currency for international trade and finance.
China Foreign Exchange Trade System, which is a unit of the country's central bank and overseas domestic foreign exchange trading, has been conducting a test run of the planned direct trading of the two currencies in its system in recent weeks, suggesting a formal launch could be imminent.
When unveiling the direct trading, the authorities will also appoint around ten banks as market makers for the pair, including several major Chinese banks and counterparts from Australia and other countries.
Australia has been an advocate of China moving to a freer exchange-rate regime, arguing that such a move is vital to balancing global growth. Recent talks between the nations have been aimed, in particular, at making the Australian dollar directly convertible with the Yuan.
China introduced the Yuan-Australian dollar exchange rate to its onshore currency market in November 2011 but trading of the pair has mostly been done indirectly through the popular U.S. dollar due to thin interest and the absence of market makers. However, as bilateral trade and investment ties expand rapidly, conditions for setting up a standalone market for the two currencies are maturing.
China is already Australia's biggest trading partner, mainly because of its strong demand for raw materials, including coal and iron ore. The close economic relationship between the two has, to some extent, helped shield Australia from the turmoil in Europe and fragility of the U.S. recovery. About 20 percent of Australia's exports are shipped to China, with two-way goods-and-services trade between the countries valued at 128 billion Australian dollars ($134 billion) for the 2011-2012 financial year. A deal would lower costs for Australian importers and exporters doing business with China.
Reprinted in part from MarketWatch