A while back there was a lot of talk about how the Chinese reminbi or yuan was going to take over from the US dollar as a global currency – this was around the time projections were being made about how China was going to overtake the US as the largest economy in the world by 2040 or some such date.
Well, as growth has slowed, such claims are not heard so frequently anymore, even though the economy continues to grow at a decent and more sustainable lick than it was a couple of years ago.
The role of the renminbi, though, has been quietly evolving and China has been pursuing a number of avenues to boost the currency’s acceptance ahead of full convertibility, which is likely still a few years off.
One project has been to sign up other trading partners, some 20 to date, for currency swap deals.
Singapore, South Korea, several Middle Eastern oil and gas producers, and Brazil have all signed up to deals allowing the trading partner’s central bank to supply local financial institutions with renminbi for use in settlement on purchases from China.
For many of these countries, of course, their sales to China may be much greater than their purchases from China, so there are limitations to how far this can grow; but HSBC is expecting the reminbi to become a top three global trade currency behind the dollar and the euro by 2015.
This week, China has signed an agreement to start direct currency trading with Australia, making the Aussie only the third currency to be traded directly with the renminbi after the dollar and the yen.
For Australia, though, it is an important step, according to the FT. China is Australia’s biggest trading partner and buys more than a quarter of the country’s exports, mainly in the form of natural resources – including coal and iron ore.
What does this move mean? To be continued in Part Two.