HONG KONG, Apr 5: Competition among potential offshore yuan centres is escalating as Australia quickens its efforts to snap up a piece of the rapidly growing business.
China and Australia will launch direct trading between their currencies in Shanghai and Sydney within weeks, a foreign bank source with direct knowledge of the matter told Reuters on Wednesday.
If realized, it will become the third country that is allowed to directly convert capital amounts to the yuan, following the United States and Japan.
Market participants say the natural resource-rich country’s advantage in developing the yuan business lies in its strong trade relationship with China, and more companies are likely to use the yuan to reduce costs.
The potential for further development will be huge, particularly against the backdrop of China’s urbanisation campaign since the world’s second-largest economy will need to import more raw materials, including iron ore and coal, from Australia to support the process.
Australia has been slow to adopt the yuan for trade settlement, with only 1 percent of its trade with China having been settled in the currency since 2009, data from global transaction services organisation SWIFT showed.
However, Lisa O’Connor, SWIFT Initiative Director of RMB Internationalization, saw a big uptake in Australia’s yuan trade settlement toward the end of 2012, especially after a A$30 billion ($31.2 billion) bilateral currency swap agreement injected confidence in the market.
Australia was ranked the third in yuan payments in December with a market share of 8.2 percent, following the United Kingdom’s 28.3 percent and Singapore’s 22.7 percent.
‘It’s less about private banking, wealth management or treasury centres. Ultimately, Australia’s main driver will be the underlying fact that it is a quite large trading partner with China,’ O’Connor told Reuters in a phone interview.
China is Australia’s top export destination, with bilateral trade worth about $120 billion.
‘If Chinese importers pay in yuan to their trading partners and banks help provide relevant currency swap products, it will boost the adoption of the currency by Australian companies,’ Raymond Leung, an analyst with ANZ bank said.
‘Once one or two very big Australian companies start to accept the yuan for their exports to China, the whole market will be activated.’
Some bankers said small and medium-sized enterprises (SMEs) are likely to take the lead in switching from dollar to yuan settlement given their flexibility in changing payment systems and a shorter decision process.
A survey conducted by global business information provider RFi for HSBC recently showed that more than 40 percent of Australia’s SMEs which currently import from or export to China intend to settle trade transactions in yuan in 2013.
Among the 500 Australian SMEs surveyed, 31 percent plan to use both U.S. Dollars and the yuan, and 13 percent intend to exclusively use the yuan.
Australia has been active to obtain a good position during the yuan internationalization process. A private-sector led annual dialogue among mainland China, Australia and Hong Kong was announced last year to discuss the opportunities in yuan trade and investment and the first meeting will be held in Sydney in 2013.
Though there is no timetable yet for a yuan clearing bank in Australia like in Hong Kong, Taiwan and Singapore, O’Connor at SWIFT did not see it as a barrier.
‘From the policy level, things are pretty well in place for Australia to increasingly use the yuan. I don’t necessarily believe a clearing bank is the key to unlocking the potential of a market,’ O’Connor said.
WEEK IN REVIEW:
* Bank of China Hong Kong, the yuan clearing bank in Hong Kong, offered to increase the preferential deposit rates for China’s yuan currency in April. The interest rates for three-month and six-month tenors were increased by 0.2 and 0.1 percentage points, respectively, to 2.3 and 2.4 percent.
* Industrial and Commercial Bank of China (ICBC) began clearing offshore yuan trades in Singapore on Tuesday, in a move that will help the Southeast Asian city-state compete more aggressively in the growing market for financial products denominated in the Chinese currency.
* Taiwan’s financial regulator has given permission for Fuh Hwa Securities Investment Trust to set up the first yuan denominated mutual fund on the island. The fund consists of a 20 billion yuan ($3.2 billion) fund targeting Hong Kong’s dim sum certificate of deposits and an eight billion yuan fund investing in Hong Kong’s dim sum bonds.
* HSBC and Bank of Communications signed an MOU on Wednesday on cross-border yuan business cooperation, including trade finance, remittance, lending, offshore investment and finance, asset custody and fund management, etc.
* China’s yuan closed at a record high versus the dollar on Tuesday, after the central bank set an unexpectedly strong midpoint, a move that traders said signalled the government’s tolerance of measured yuan appreciation.
(AGENCIES)
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