China Business: Direct convertibility will catch on, say bankers

Direct Convertibility: John Key and Li Keqiang "trade currencies" at the Great Hall of the People.

Institutional trades have predominated since the historic move to direct convertibility of the New Zealand and Chinese currencies began last month.

But that will change if the pricing of the global commodity trade ultimately moves away from a singular reliance on the US dollar.

Trading figures show that $60 million of "Kiwi" was converted directly into RMB during March - with an average of 20 deals across all 10 price makers.

This replicates the pattern in the Australian market after direct convertibility of the Aussie dollar into RMB was launched a year ago.

Westpac's Karen Silk is confident that though institutional trades have dominated since "direct convertibility" began on March 19, significant client trade will build.

"What has happened is there is significant client inquiry coming through," says Silk.

"People trying to understand how it works."

Westpac, ANZ, HSBC and ICBC are among the banks represented in New Zealand that have received approval from the People's Bank of China to act as "market makers"or intermediaries for direct trading of the New Zealand dollar and the renminbi on the China Foreign Exchange Trading System. The market maker licence allows direct interbank trading of the New Zealand dollar and Chinese yuan, meaning reduced transactional costs and, over time, increased liquidity to currency deals between New Zealand and Chinese trading partners.

ANZ's David Green believes opening up the RMB for direct trade with other currencies "reflects a desire to internationalise the renminbi and speed up reform of China's financial markets.

"The owner of one New Zealand-based engineering firm tells us this new capability has helped give him the impetus to grow his business, explore new opportunities in China and deal with a wider range of Chinese suppliers and customers," he says.

Both Green and Silk expect the trading volumes to build up gradually over time. Silk says most of the inquiries are coming from smaller clients and from more importers rather than exporters.

"This reflects the fact that what's being exported from New Zealand by the big guys is largely in US dollar- denominated commodities.

"If you start to see a significant weighting of soft commodities globally heading to Asia and China - and more flexibility about the RMB - then that is when we would expect to see more flow build."

Prime Minister John Key and Chinese Premier Li Keqiang launched the direct convertibility of the currencies at the Great Hall of the People on March 18. Key said then that the agreement "will make doing business with China easier by reducing the costs of converting between the two currencies, and will stimulate trade and investment.

"Direct trading will also increase the integration between the New Zealand and Chinese financial systems, and deepen the economic relationship between the two countries." HSBC notes that around 12 per cent of China's total foreign trade is currently settled in RMB.

HSBC expects this to rise to around 30 per cent by 2015.

Currency facts

•NZ dollar - 6th currency to be directly traded with RMB
•Cuts out need to convert via US dollar
•RMB - 2nd most used currency in trade finance

Market Makers

•Industrial and Commercial Bank of China
•Bank Of China
•China Construction Bank
•China CITIC Bank
•HSBC Bank (China)
•CitiBank (China)
•Bank of Montreal (China)
•China Guangfa Bank
•ANZ (China)
•Westpac Shanghai