China and Australia in USD 31bn currency swap

It is a step towards boosting the renminbis profile in developed markets.Beijing has established nearly 20 bilateral swap lines over the past four years, but Australia ranks as the biggest economy yet to sign such a deal, which analysts said could give a shot in the arm to Beijings goal of internationalising its currency.While central banks normally use swaps to provide liquidity to each other in the event of a financial crisis, China has been using them to lay the groundwork for the renminbis slow march into global markets.In announcing the Rmb200bn/A$30bn (USD 31bn) deal, the Reserve Bank of Australia said: The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial co-operation.It added that there were increasing opportunities available to settle trade between the two countries in Chinese renminbi and to make renminbi-denominated investments.China now has more than Rmb1.5tn in swap lines with other central banks, but they have largely been symbolic. Only HongKong, the hub of offshore renminbi trading, has had to activate its swap with China, doing so briefly in 2010 when it faced a renminbi squeeze.Nevertheless, the symbolic steps are beginning to add up to something bigger, according to Shen Jianguang, an economist with Mizuho Securities in Hong Kong.Its quite significant. They havent had agreements with such advanced economies. This will gain momentum, he said.There has been talk in the market that the Bank of England and the Bank of Japan could soon be in line for currency swaps with China.Building up a global pool of renminbi is proving a challenge for China. The currency is only permitted to flow out of the country through tightly controlled channels, mainly trade.The settlement of trade deals in renminbi grew swiftly from a low base over the past two years, but it has appeared to run out of steam in recent months and offshore renminbi deposits have declined.Some economists say that until China takes bolder steps to open its capital account, allowing freer currency flows across its borders, the project of renminbi internationalisation will not fulfil its promise.Chinas deal with Australia also underscores the close economic ties between the two countries.China is Australias biggest trading partner and the main market for it exports of iron, coal and gas. Figures released by the government on Wednesday showed China had consumed a little more than quarter of Australias total resource and energy exports in the 2011 financial year.Andrew Skinner, head of global trade and receivables finance at HSBC Australia, said the agreement was a sensible and logical progression of Australias relationship with China.Its a big step forward in formalising the internationalisation of the renminbi, he said. It will help a lot of people get more comfortable using the currency knowing that these sorts of arrangements are in place.