Interpac Business and Migration Solutions Melbourne Australia

(November 30, 2011)

BEIJING - China opened its currency market to direct trading of the yuan against the Australian and Canadian dollars on Monday, bringing the total of foreign currencies that can be directly traded with it to nine.

The central parity rate for the yuan against Australian dollar was set at 6.2491 on Monday while the Canadian dollar/yuan central parity rate was 6.1048, according to the China Foreign Exchange Trading System.

On the spot market, the yuan can rise or fall 3 percent against the two foreign currencies from their daily central parity rates.

The two foreign currencies join seven others -- the US dollar, HK dollar, Japanese yen, euro, British pound, Malaysian ringgit and Russian ruble -- that are allowed to be traded on China's interbank foreign exchange market.

Analysts said the new currency pairs will help facilitate bilateral trade and investment as well as push the internationalization of yuan.

Both Australia and Canada are among China's major trade partners, especially with regard to resources, and their economies are in better shape than those of other developed nations, said Zheng Lei, a senior executive with the international investment business of China Merchants Bank.

Adding the two currency pairs is a significant part of yuan's internationalization process, and it can help simplify bilateral trade and investment by avoiding "detouring" through a third-party currency, said Bai Ming, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

Before the launch of the two currency pairs, acquiring Australian or Canadian dollars required a two-step trade -- selling yuan for US dollars and then selling the greenback for Australian or Canadian dollars.

Bilateral trade volume between China and Australia surged more than 40 percent year-on-year to $88.1 billion in 2010 while Sino-Canada trade volume hit $37.18 billion.

In the end, the success of the yuan's internationalization cannot be simply judged on the number of foreign currencies linked to it but its global acceptance, according to analysts.

Internationalization of the yuan will be more meaningful only when the currency acquires a status in the international financial market, Bai said.

Further, reform on domestic financial system should be accelerated to encourage increasing global use of the yuan, said Yin Jianfeng, a researcher at the Institute of Finance and Banking under Chinese Academy of Social Sciences -- a government think-tank.

The country's financial system, currently based on traditional banking sector, will face a great challenge in offering efficient investment and risk management options for international investors if the yuan is internationalized, Yin said.

He used the country's stock market as an example. Although China's stock market ranked the world's second largest in 2009 in terms of market value, it only had around 1,700 listed companies, compared with 7,459 in the eurozone, 6,408 in India and 5,179 in the United States.

The yuan is not fully convertible under the capital account but China has stepped up efforts to raise the currency's international over the past few years.

The Chinese government allowed Hong Kong to establish an offshore yuan market and has expanded trade settlement agreements and currency swaps to create more channels for the yuan to circulate outside the mainland.

Premier Wen Jiabao reiterated last month that the government will gradually push forward the convertibility of the yuan and boost cross-border use of the currency.

Source from Chinadaily.com