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Page added on April 1, 2013
China-Australia to Ditch US Dollar
A month ago we pointed out that as a result of Australia’s unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip.
Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world’s “reserve currency” in its trade dealings with the world’s biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process “slashing costs for thousands of business” and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar’s reserve currency status until one day it no longer is.
That said, this latest development in global currency relations should come as no surprise to those who have followed our series on China’s slow but certain internationalization of its currency over the past two years. To wit: “World’s Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade“, “China, Russia Drop Dollar In Bilateral Trade“, “China And Iran To Bypass Dollar, Plan Oil Barter System“, “India and Japan sign new $15bn currency swap agreement“, “Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says“, “India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees“, and “The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap.”
And while previously the focus was on Chinese currency swap arrangements, the uniqueness of this weekend’s news is that it promotes outright convertibility of the Yuan: something China has long said would happen but many were skeptical it ever would. That is no longer the case, and with Australia setting the precedent, expect many more Asian countries (at first) to follow in Australia’s footsteps, because while the developed world is far more engaged in diluting its currency as a means to spur “growth”, Asian and developing world nations are still engage in real, actual trade, where China is rapidly and aggressively becoming the world’s hub.
More from The Australian:
Former ambassador to China Geoff Raby, now a Beijing-based business figure, told The Weekend Australian: “The value of such a deal would be substantial for exporters to China, especially those that import a lot from China like mining companies, as it would remove business constraints including exchange-rate risks and transaction costs.”
Businesses, like individuals when travelling, have to pay extra to convert currency since there are different rates for buying and selling.
So removing one step also cuts out the cost of paying for such a “spread”.
Australia has undertaken significant lobbying for the deal and the direct conversion of the yuan, also referred to as the renminbi (RMB), is identified as a priority in the government’s Asian century white paper.
“We have held preliminary discussions with the Chinese government to explore how soon direct convertibility can be practicably achieved,” the white paper says.
“We are continuing these discussions, and also exploring other opportunities to work with China to support the internationalisation of the RMB.”
Australia’s banks increasingly arrange trade finance through Hong Kong, which has developed a special role as China’s chief international finance centre.
Needless to say, China is eagerly looking forward to taking yet another bite out of the USD’s reserve status.
New President Xi Jinping, a former Communist Party secretary of Shanghai, is a champion of that city’s development as China’s finance hub, and it is believed that the Prime Minister may fly there to sign the currency conversion deal.
Ms Gillard is expected to go on from Shanghai to Beijing, where she will open the third Australia China Economic and Trade Forum organised primarily by the Australia China Business Council, which will be bringing about 100 people from Australia for the event. Participants are likely to include Andrew Harding, Rio Tinto’s new chief executive for iron ore; Warwick Smith, ANZ Bank’s chairman for NSW and the ACT; Australian Trade Minister Craig Emerson and Financial Services Minister Bill Shorten; Gao Hucheng, China’s Commerce Minister; and Gao Xiqing, the acting head of China Investment Corporation, the country’s vast sovereign wealth fund.
The ANZ Bank has been a strong advocate of direct convertibility between the dollar and the yuan. Gilles Plante, the bank’s chief executive in Asia, said in a recent report that in the last financial year, China accounted for 29 per cent of all exports and 18 per cent of imports, but the value of that trade denominated in yuan was less than 0.3 per cent.
He forecast that cross-border flows of funds would be liberalised “to support Shanghai’s plan to build itself as a global financial centre. At the time the whole world is digging out opportunities from the rise of the yuan, Australia should not lag behind.”
It was significant the liberalising governor of the People’s Bank, Zhou Xiaochuan, kept his job during the reshuffle of China’s leadership. He said last year at a conference: “The next movement related to the yuan is going to be reform of convertibility. We are moving in this direction; we need to go further, we will have some deregulation.”
Most importantly, to China, Australia will serve as the Guniea Pig – should this experiment in FX liberalization work out to China’s satisfaction, expect Beijing to engage many more trade partners in direct currency conversion.
Beijing appears to have chosen Canberra as its partner in this next movement for straightforward economic reasons, as Australia has become China’s fifth-biggest source of imports and thus, the appropriate partner for the march of its currency.
Ms Gillard and President Xi Jinping may also during the visit establish a “strategic partnership” between the countries. This will enable Australia to catch up in status with a large range of nations.
Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives – both fiat, and hard-asset based – to the USD appear. And since there is no such thing as a free lunch, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future.
14 Comments on "China-Australia to Ditch US Dollar"
dsula on Mon, 1st Apr 2013 1:31 am
It’s zerohedge, aha. A waste of reading time. But anyways, the sooner the US$ is no longer the world reserve currencey, the better for the US.
Beery on Mon, 1st Apr 2013 2:36 am
If Australia and China are ‘joined at the hip’ all I can do is warn China – keep a hand on your wallet.
There’s a reason they call Australia ‘The only prison visible from the Moon’.
Shaved Monkey on Mon, 1st Apr 2013 2:41 am
This is WOMD that wont be tolerated.
The Government that tries to implement that will be overthrown by the US overlords.
Just like ex Prime minister Rudd was when he tried to introduce a real Mining Tax and talked of setting Australia up as a Asian banking hub with a universal pan Asian currency.
[quote]WikiLeaks outs Mark Arbib as US informant.
Senator Arbib was one of the “faceless men” who was instrumental in the decision to oust Kevin Rudd and install Julia Gillard as Prime Minister in June.[/quote]
http://www.theaustralian.com.au/in-depth/wikileaks/us-espionage-trial-endgame-for-julian-assange/story-fn775xjq-1225967923486
BillT on Mon, 1st Apr 2013 4:34 am
dsula, if you really believe that, tell me why. Loss of reserve status will make EVERYTHING imported in the US more expensive. Much more as the dollar will become Charmin as far as other countries are concerned. It IS coming, but you better have your money out of banks and paper assets when it happens.
The Us has fought wars to keep the reserve status and spent many trillions of dollars. If it isn’t important, tell me why?
Arthur on Mon, 1st Apr 2013 10:07 am
“But anyways, the sooner the US$ is no longer the world reserve currencey, the better for the US.”
That is like a marathon runner in pole position asking for a backpack with 10 kg stones in it.
Very helpfull for staying in pole position indeed.
Arthur on Mon, 1st Apr 2013 10:37 am
Australia is playing a dangerous game here, as the US is effectively the only garantor of Australia’s security. Who else? Britain?.lol
But this is the result of the impotence of Washington of slashing it’s budget, because if they do, they will risk OWS^2. Or all the imported ‘diversity’ becoming obstinate and start an uprising like in Britain a while ago. Or the GOP whities, still with a job and mortage, protesting tax increases and going into a Tea Party^2 mode. So the only thing left for Washington is trying to print itself out of trouble and this is now being noticed even by US-friendly Aussies.
It remains to be seen if it is wise for the Australians to antagonise the Americans and refuse to carry a part of Washington’s deficits, via inflation.
Consider: when the resource situation will become acute, as it likely will in the coming years, the Chinese government is still stuck with 1300 million hungry mouths. Obviously the Chinese government could say to it’s citizens: “look, we know you are hungry, but invading other countries is against international law and human rights, so please die.” This would be a novum in history and is unlikely to happen. In 1941 the Japanese were in a similar situation (brought there via an oilembargo by the Roosevelt government, keen on starting a war against Germany via the Japanese backdoor) and invaded Indonesia to get the necessary oil there or lose the war. And dealing an equally necessary blow against the fleet in PH, to avoid being attacked in the flank. When the Chinese will be the ones with the back against the wall, they might be tempted/forced to make a similar move into relatively empty Australia and go after the coal. The other resource route, north into Siberia will be blocked by the nukes of Greater Europe (or those of Russia alone).
Arthur on Mon, 1st Apr 2013 10:37 am
Australia is playing a dangerous game here, as the US is effectively the only garantor of Australia’s security. Who else? Britain?.lol
But this is the result of the impotence of Washington of slashing it’s budget, because if they do, they will risk OWS^2. Or all the imported ‘diversity’ becoming obstinate and start an uprising like in Britain a while ago. Or the GOP whities, still with a job and mortage, protesting tax increases and going into a Tea Party^2 mode. So the only thing left for Washington is trying to print itself out of trouble and this is now being noticed even by US-friendly Aussies.
It remains to be seen if it is wise for the Australians to antagonise the Americans and refuse to carry a part of Washington’s deficits, via inflation.
Consider: when the resource situation will become acute, as it likely will in the coming years, the Chinese government is still stuck with 1300 million hungry mouths. Obviously the Chinese government could say to it’s citizens: “look, we know you are hungry, but invading other countries is against international law and human rights, so please die.” This would be a novum in history and is unlikely to happen. In 1941 the Japanese were in a similar situation (brought there via an oilembargo by the Roosevelt government, keen on starting a war against Germany via the Japanese backdoor) and invaded Indonesia to get the necessary oil there or lose the war. And dealing an equally necessary blow against the fleet in PH, to avoid being attacked in the flank. When the Chinese will be the ones with the back against the wall, they might be tempted/forced to make a similar move into relatively empty Australia and go after the coal. The other resource route, north into Siberia will be blocked by the nukes of Greater Europe (or those of Russia alone).
dsula on Mon, 1st Apr 2013 10:48 am
The sooner the US learns to live within it’s productive capacity the better for the US. The downfall WILL come. The longer it’s extended by debt, currency gimmicks, army, etc, etc the harder the fall will be.
BillT on Mon, 1st Apr 2013 1:35 pm
Arthur, the Pacific to New Zealand is under Chinese control even today. Do you think that Guam is not the target of several missiles, maybe even a nuke? Do you think the Us is going to do anything against China except complain? I don’t.
The Chinese are now the big dog in the neighborhood since the EU and the US are dying financially. They have a lot of investment in all of the Asian countries and know that they can take whatever they want. How is that different from NATO or the Empire in the Middle East and Africa? It isn’t.
Arthur on Mon, 1st Apr 2013 1:56 pm
“Arthur, the Pacific to New Zealand is under Chinese control even today.”
Simply not true. The Chinese does not have a navy worth mentioning or an airforce.
http://www.foxnews.com/politics/2011/11/16/new-agreement-will-expand-us-military-presence-in-australia/
Target is not equal control.
“The Chinese are now the big dog in the neighborhood since the EU and the US are dying financially.”
Nobody is “dying”, not even the US. The west is living beyond it’s means indeed, but is still top dog… by far. EU + US = 33T$, 5 times that of China.
“they can take whatever they want. How is that different from NATO or the Empire in the Middle East and Africa? It isn’t.”
They can take Tibet, but that is about it. Meanwhile the US is the only power with a substantial presence in the Gulf. They are in Japan, in the Philipines and many places more. China, in many respects is still a baby. They can’t even produce a car, let alone a plane, just Walmartjunk.
You have such an extreme Asia-bias that I sometimes suspect that you are an Asian posing as an Euro-American. Sometimes.
Arthur on Mon, 1st Apr 2013 2:03 pm
“The sooner the US learns to live within it’s productive capacity the better for the US. The downfall WILL come. The longer it’s extended by debt, currency gimmicks, army, etc, etc the harder the fall will be.”
That’s the spirit. It will be hard at first, but I repeat my opinion that of all major powers the US has the best conditions for survival in the rest of the century. They are only ‘threatened’ by Canadians and Mexicans.lol, have a relatively low population density, a lot of resources, a lot of solar potential in the south. And a non-imperial US will not have trouble finding potent allies (Europe, Russia). Just get rid of AIPAC, close your borders, declare Texas and California spanish speaking provinces of a US confederation a la Switzerland and happy days are here again.
dsula on Mon, 1st Apr 2013 5:00 pm
Hihihi Arthur. Texas & California? You mean Texas, California, Arizona, Nevada, Utah, Oregon, Washington, NY, NJ, Florida, Illinois, New Mexico, Massachusetts, Carolinas, Maryland, DC, Colorado. It’s probably easier to just declare the US as a Mexican province.
Arthur on Mon, 1st Apr 2013 7:32 pm
You are exagerating… maybe 20% Mexicans. In Switzerland Germans, French and Ialians lived peacefully side by side for centuries… because they live separated/segregated, each in their own mono-linguistic largely independent kantons. Canada same story. Iraq is now peaceful as well… at the cost of hundreds of thousands deaths. Yugoslavia same story.
BillT on Tue, 2nd Apr 2013 2:42 am
Arthur your Eurocentricity is showing! What country needs a big navy when a missile will take out any carrier on the ocean today? Why does it need an airforce when the threat of missiles raining down on your city is as good as the real thing? China can hit ANYPLACE on the earth and everyone knows it. They own the Pacific.