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Making sense of trade announcements from China

This week there were several announcements about New Zealand’s trade relationship with China during Prime Minister John Key’s visit, including the ambitious goal to achieve two-way trade of $30 billion by 2020 and the launch of direct currency trading.

Trade between the two countries topped $18 billion last year, with China surpassing Australia as New Zealand’s biggest trading partner.

Gerard Field, head of global markets for HSBC New Zealand, says direct currency exchange makes exporting and importing easier, but doesn’t change the fundamentals of the trade relationship.

China has a growing middle class and New Zealand is capitalising on it with exports, he says.

Also this week, Statistics NZ announced annual gross domestic product growth – from the December quarter 2012 to the December quarter 2013 – to 3.1%. Average annual growth was 2.7%.

“A great deal of that growth is off the back of exports to China. I think we are in the right place in the right time to provide the kind of high-quality products that we do,” Mr Field says.

New Zealand is the fourth country in the Organisation for Economic Co-operation and Development (OECD) to trade directly against the yuan in Shanghai, joining the Australian dollar, the Japanese yen and the US dollar. 

Before the direct currency announcement, deals between China and New Zealand were transacted in a third currency, typically US dollars.

Three well-established New Zealand banks were appointed market makers by the People’s Bank of China: Westpac, ANZ and HSBC.

The market-maker licence allows direct interbank trading of the currencies, which banks say reduces transactional costs and, over time, increases liquidity to currency deals between New Zealand and Chinese trading partners.

Among the other banks which have been approved is ICBC, which opened its first New Zealand branch in Auckland late last year.

Other Chinese banks appointed by the People’s Bank of China as money makers include China Construction Bank, Bank of Communications and Standard Chartered Bank.

With all of these announcements from China adding up, NBR ONLINE sat down with Mr Field to explore what these developments mean for New Zealand.

NBR ONLINE: After our story about direct currency trading, reader comments started to roll in. One reader says: "This means that Chinese companies buying up our businesses, houses and land, can indeed take their profits offshore?" Can you respond to this reader's assertion?

Mr Field: What has changed is the conversion of currency is a little bit easier. Direct trading of currency doesn’t change the fundamentals of the relationship between China and New Zealand. We have the free-trade agreement already in place. What this will do is just make it easier and more transparent for the pricing of the flows between renminbi and the New Zealand dollar.

NBR ONLINE: The New Zealand dollar is among the first half dozen currencies to be made fully convertible with the renminbi after the US dollar, Japanese yen, Australian dollar, Russian ruble and Malaysian ringgit. Is New Zealand late to the party or is this delay in line with the size of the economy?

Mr Field: We’re actually ahead of the game given the size of New Zealand versus those other currencies. I would have thought other currencies would like to have what we’ve just been given. The government has done a good job at pushing that agenda.

NBR ONLINE: Do you expect New Zealand's central bank to hold some of its reserves in Chinese government bonds?

Mr Field: I don’t know what the Reserve Bank will plan to do with its international reserves but, definitely, there are other reserve banks around the world that are holding renminbi as a reserve currency: Korea, Thailand and even the Reserve Bank of Australia. As the internationalisation of renminbi continues, I think you’ll see more central banks will hold reserves.

More by Stephanie Flores

Comments and questions

Certainly time to review the TWI basket of currencies to reflect our current and expected export ratios Too much Euro in there now.

Shanghai — China's yuan has overtaken the Swiss franc to become the seventh most-used currency for payments worldwide, a global transaction services organisation said, as Beijing seeks to further internationalise the unit.
The market share of the yuan was 1.39 percent in January, putting it in the top 10 most-used currencies in global payments for the third consecutive month, SWIFT said. It moved up from eighth place in December.
Hong Kong, Britain, Singapore, Taiwan and the United States were the top five offshore markets using yuan for payments, it said.
"Hong Kong continues its role as the leading RMB hub," Moon said. "These new offshore markets play a significant role in maintaining the RMB's position as a ?business as usual' world payments currency."
Britain's financial minister, George Osborne, said earlier this month that his country was holding talks with China to designate a clearing bank for the yuan as it tries to grow London's role for trading the currency.
Nearly two-thirds of yuan payments outside of China and Hong Kong, a special administrative region of China, take place in London, he said.
China's yuan is not freely convertible, but the government is gradually moving towards full convertibility so that the unit might one day rival the US dollar. (AFP)
- London and Geneva and Toronto may become hubs?

If the yuan is becoming such a well used currency, why can't Fonterra, for example, trade directly with China instead of having to go through the expensive exercise of trading in US dollars?

The currency trading announcement last week is supposed to fix that. Fonterra and other New Zealand exporters and importers should be able to trade directly with the yuan, instead of exchanging to US dollars first. Some analysts are questioning whether the banks will pass on the savings of one currency exchange transaction rather than two.

" ... but doesn’t change the fundamentals of the trade relationship ... "

I would agree with Mr Field. New Zealand will continue to get reemed.