The new Shanghai Free Trade Zone is big news on so many fronts but none more so potentially than the currency front, given the liberalisation of currency and interest rate movements and the move toward the Renmimbi’s (RMB, Yuan) convertibility.
Even without convertibility, the important role that China plays in global trade was already increasing the RMB’s share of global forex trade, as this graphic from the Wall Street Journal at the time of the recent release of the BIS Triennial Forex Survey shows.
The ANZ summarises the changes announced over the weekend in the following manner:
- It will encourage RMB’s convertibility, interest rate liberalisation, and further cross-border usage. The companies located in the FTZ are encouraged to take advantage of both onshore and offshore markets.
- It will further open up the financial services industry to both private and foreign capital, and encourage setting up of foreign-owned banks and Chinese-foreign joint venture banks.
It will allow setting up the trading platform integrated with the global markets, and gradually allow the foreign companies to engage in commodity futures trading and encourage financial innovation.
- It will lower the barrier for foreign investors to enter the service industry, including engineering, construction, financial leasing, shipping, cultural services, and professional services.
- It will adopt a “negative list” approach and new investment rules in accordance with international practices. For example, foreign investments in the FTZ and overseas investments by local enterprises will not require official approval from government agencies, but only need to follow the “archival filing management” process.
The Australian dollar for many years has been a proxy for emerging markets and more recently China, both directly and through the linkage between the Australian Economy and the Chinese economy. But because the RMB does not float and is only allowed to move in line with Chinese authorities’ wishes, there is a lot more volatility in the Aussie than there is in the RMB on any given day or month.
You could also probably argue that there is a lot of extra trade in the Aussie because of the linkages of the two countries and their economies that will otherwise flow to the RMB when it eventually floats.
Equally there is a solid case that much of the Aussie dollar’s strength above parity until April/May this year was a direct bet on a China proxy.
So the good news for the Australian economy is that the liberalisation of the RMB, as gradual as it might be, will take pressure off the Aussie dollar to be a China proxy.
That means the overall level can probably fall back to something more reflective of the Australian economy alone rather than Chinese growth per se.
So maybe, just maybe, the Aussie dollar might be able to resume its historic role as the shock absorber for the local economy. It’s some time away yet, but things are moving in the right direction.
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