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Business
Print Edition> Business
UPDATED: April 22, 2013 NO.17 APRIL 25, 2013
Inching Toward Internationalization
The yuan is on the way to becoming a global currency, but plenty of work remains
By Lan Xinzhen
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SEEKING OPPORTUNITIES: An Australian businessman talks to a Chinese consulting company employee in Tianjin on November 5, 2012, during a China mining conference (YUE YUEWEI)

Australian Prime Minister Julia Gillard's April visit to China was quite fruitful. Besides developing closer political and diplomatic ties, economic cooperation was a major highlight. The two countries agreed to allow direct conversion between the yuan and Australian dollar, which began on April 10, and the exchange rate between the two currencies will be unpegged from the U.S. dollar. The Australian dollar will become the fifth foreign currency that can be directly traded with the yuan after the U.S. dollar, Japanese yen, the ruble and the Malaysian ringgit.

At a press conference in Shanghai, Gillard said, "This is a huge advantage for Australia, not only for our big business, but also for our small and medium enterprises that want to do business here (in China)."

Zhang Jianping, Director of the International Cooperation Office under the National Development and Reform Commission, China's top economic planner, said that after direct trading between the yuan and Australian dollar, the two countries will no longer need the U.S. dollar as an intermediary, saving on costs on bilateral business, tourism and investment.

Li Jianjun, an analyst with the Institute of International Finance at the Bank of China, said that China and Australia, the former a major energy importer and the latter a major exporter, can now cooperate with each other under special trade rules and directly use the yuan or Australian dollar as a trading currency, which can effectively avoid exchange rate risks brought by the U.S. dollar.

The exchange rate between the yuan and Australian dollar has thus far remained stable without any abnormal fluctuations, indicating the market has responded well to the direct trading of the two currencies.

Demand of the market

At present, China is Australia's biggest trading partner, biggest export destination and the biggest source of imports, while Australia is an important trading partner for China's mineral resource needs. The two countries are also bilateral investment partners.

"Both bilateral trade and investment between China and Australia are growing rapidly, requiring direct convertibility between the currencies of both countries," said Zhang.

According to a survey carried out by HSBC at the beginning of this year, more than 40 percent of small and medium-sized Australian companies that do business with China are planning to directly use the yuan in trade settlements.

There is also demand in the Chinese market to make the yuan more international. When both countries have equal demand, direct trading between the two currencies is a reasonable step, say experts.

The U.S. dollar used to be the settlement currency in China-Australia trade. One party had to convert its currency into the U.S. dollar for payments, while the receiving party had to convert the payments to its local currency. Direct trading between the two currencies will allow for savings on transaction costs.

Zhang said that both Chinese and Australian companies will benefit from direct convertibility, but trading volume and the amount of currency being converted will ultimately decide which country benefits more.

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