Why Yuan Deal Matters To You

April 8, 2013, 12:58 pm Alex Brophy Yahoo!7

There's been a lot of hoo-ha about currency exchange opening up with China. Here's why it matters to you.

Why Yuan Deal Matters To You

The governor of China’s central bank, the People’s Bank of China, has ratified direct exchange of the Yuan with the Australian dollar.

"This is a strategic step forward for Australia as we add to our economic engagement with China," PM Julia Gillard said of the landmark agreement.

"This is a huge advantage for Australia. Not only for our big businesses but also for our small and medium enterprises that want to do business here."

"All of this is about growing our economic exchange between Australia and China. That's good for Australian jobs, good for Australian growth."

Why does this yuan deal matter to you? Because it has huge implications for Aussie businesses.

Previously Australian companies wanting to trade in Chinese currency had to first convert to either US dollars or Japanese yen, and then into yuan. This convoluted process of doing business significantly increased the cost to complete any transaction.

And for a country doing 23% of its trade with China, these costs are substantial.

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So removing the unnecessary hurdles and allowing direct currency conversion with the yuan significantly reduces costs for importers and exporters alike. The benefits to the broader economy in cost savings and increased trade are obvious.

You see open exchange makes Australian exports more competitive because they no longer have that extra cost built into their prices.

And on the import front it will allow importers to negotiate better prices by offering to pay with the local currency because Chinese suppliers prefer dealing in the yuan.

Why? Because it is costly, time consuming and sometimes difficult to exchange US dollars in China.

In a broader impact the move will also open up opportunities for Australian companies and individuals to borrow yuan denominated loans. And with the biggest bank in the world, the Industrial and Commercial Bank of China, opening its third branch in Australia in November, the opportunity couldn’t be more timely or accessible.

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This week's announcement follows on from a $30 billion currency swap agreement with the RBA executed last year, which was a significant step towards opening up the currency to full convertibility.

As direct exchange opens further, its expected the yuan will quickly replace the Euro as the world’s second currency and down the track will rival the US dollar in its widespread use and as a store of value.

Of course all this will only happen as and when the Chinese government wants it to, but if todays deal is anything to go by, it could be sooner rather than later.

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