China Busy Signing Currency Deals

Chinese currency : Renminbi.

Chinese currency : Renminbi. (Photo credit: Wikipedia)

China took one more step last week towards internationalizing the yuan, ultimately leading to the day when the Chinese currency will be a substitute for the U.S. dollar in all of China’s trade with other countries.

Last Friday, China and Brazil agreed on a currency swap deal that will allow the central banks of each country to exchange local currencies worth up to 60 billion reals, or 190 billion yuan ($30 billion). The amount can be used to shore up reserves in times of crisis or to boost bilateral trade. China is Brazil’s largest trading partner, with bilateral trade of approximately $100 billion.

China’s currency deal with Brazil follows a similar deal with Australia that was struck  in March and allows for an exchange of local currencies between the Australian and Chinese central banks, worth up to 30 billion Australian dollars ($31 billion) over three years. Again, the motivation behind the deal is to support bilateral trade between the two countries which already exceeds $100 billion, reduce transaction costs and reduce reliance on the greenback.

Also this year, China and the United Arab Emirates (UAE) signed a three-year currency swap agreement worth 35 billion yuan ($5.54 billion) in January, and a $1.6 billion deal withTurkey in February. China’s bilateral trade is approximately $35 billion with the UAE and $24 billion with Turkey.

China began the process of internationalizing its currency in November 2010 when then-Russian Prime Minister Vladimir Putin and Chinese Premier Wen Jiabao announced that Russia and China had decided to use their own national currencies for bilateral trade, instead of the U.S. dollar. The yuan started trading against the ruble in the Chinese bank market in Shanghai immediately, and in December 2010, began trading on the Moscow Interbank Currency Exchange. This is the first time that the yuan has traded outside of China and Hong Kong. Bilateral trade between China and Russia is currently about $70 billion, with the two countries having a common goal of increasing trade to $200 billion by 2020.

China followed the 2010 deal with Russia by agreeing to a deal with Hong Kong last November that will give the territory more access to the Chinese currency, enabling Hong Kong to access 400 billion yuan ($63 billion) from the Chinese central bank, up from 200 billion yuan.

As 2011 came to a close, China and Japan said that they are working on plans to promote a direct exchange of their currencies in a deal that will allow firms from both countries to convert the Chinese yuan and the Japanese yen directly into each other. Currently, businesses in China and Japan need to buy U.S. dollars before converting them into the desired currency, adding extra costs. Just yesterday, the Japanese Finance Ministry said that it’s considering measures to further encourage direct trading between the yen and the yuan. Bilateral trade between China and Japan exceeded $297 billion in 2010.

In reference to the deal that China reached with Japan, Ren Xianfang of IHS Global Insight was quoted as saying, “Given the huge size of the trade volume between Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations.”

In a November 2010 report on the subject, HSBC predicted that at least half of China’s trade flows with emerging market countries could be settled in renminbi within three to five years, from less than 3 percent in 2010. HSBC predicted that nearly $2 trillion worth of trade flows could be settled in renminbi annually, making it one of the top three global trading currencies. As the deals with Australia and Japan suggest, however, China will not be satisfied to limit its currency deals to emerging economies, but will also seek to strike deals with developed countries as well.

Not counting its agreement with Hong Kong, which is part of the People’s Republic, China has negotiated specific currency deals with four countries (Brazil, Australia, Turkey and UAE) over the past two years, totaling almost $70 billion, and has reached agreements to settle bilateral trade with two others, Russia and Japan. All told, these six countries account for over $500 billion of annual trade.At this rate, the predictions made by HSBC may prove to be conservative.

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