By ENDA CURRAN
SYDNEY—Australia and China have agreed to allow each other's currencies to be directly converted, Prime Minister Julia Gillard said Monday. Starting Wednesday, the Australian dollar will be directly convertible into the yuan and vice versa.
Associated Press
Australian Prime Minister Julia Gillard called the deal a 'huge advantage.'
The agreement does away with the need for companies and currency traders to first convert their Australian dollars or yuan into U.S. dollars.
"This is a huge advantage for Australia," Ms. Gillard told reporters in Shanghai, flanked by executives from some of Australia's biggest banks. "It's a strategic step forward for Australia as we add to our economic engagement with China."
The Australian prime minister, on a five-day visit to China that began Friday, said the People's Bank of China had already approved licenses for Westpac Banking Corp. WBC.AU +1.65% and Australia & New Zealand Bank to act as market makers for direct trading of the currencies.
"This takes costs out and makes it a whole lot more convenient," said Gail Kelly, chief executive of Westpac, said at the press conference. Several major Chinese banks are also expected to be appointed as market makers, said a person familiar with the matter.
China introduced a yuan/Australian dollar exchange rate to its onshore currency market in November 2011, but trading of the pair has been done indirectly through the U.S. dollar. Some analysts said the new agreement would take time to change the shape of currency transactions between the two countries. Australia's exports to China are mostly bulk commodities, including iron ore and coal, priced in U.S. dollars. Few expect that arrangement to be altered soon.
"There is still going to be an exchange rate between the Australian dollar and U.S. dollar," said Fariborz Moshirian, a Sydney-based academic at the Australian School of Business.
Australian businesses have been slow to embrace the yuan, but that may be changing. Local companies sharply increased their use of China's currency for global trade payments late last year, according to the Society for Worldwide Interbank Financial Telecommunication, a global payments system.
Mike Smith, chief executive of ANZ Bank, expects trading volumes to grow as a result of the new two-way agreement.
"It will become a proper traded currency mix and the volumes of that are limitless," Mr. Smith said at the press conference.
The close economic relationship with China has helped shield Australia from the turmoil in Europe and the fragility of the U.S. recovery. About 20% of the nation's exports go to China, with two-way goods-and-services trade between the countries valued at 128 billion Australian dollars (US$133 billion) for the 2011-12 financial year.
Ms. Gillard's government has advocated a freer exchange-rate regime in China, arguing that such a move is vital to balancing global growth. Recent talks between the nations have been aimed at boosting yuan-denominated trade.
For its part, Beijing is slowly working to liberalize the yuan. In 2012, it allowed the currency to move within a wider daily range against the U.S. dollar as part of broader overhauls to help make it a more market-oriented and globalized currency.
"It's in everyone's interest to see further internationalization of the (yuan)," Ms. Gillard said.
—Wynne Wang in Shanghai contributed to this article.
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