Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency Convertibility

Tyler Durden's picture

A month ago we pointed out that as a result of Australia's unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip.

Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world's "reserve currency" in its trade dealings with the world's biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process "slashing costs for thousands of business" and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar's reserve currency status until one day it no longer is.

That said, this latest development in global currency relations should come as no surprise to those who have followed our series on China's slow but certain  internationalization of its currency over the past two years. To wit: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", and "The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap."

And while previously the focus was on Chinese currency swap arrangements, the uniqueness of this weekend's news is that it promotes outright convertibility of the Yuan: something China has long said would happen but many were skeptical it ever would. That is no longer the case, and with Australia setting the precedent, expect many more Asian countries (at first) to follow in Australia's footsteps, because while the developed world is far more engaged in diluting its currency as a means to spur "growth", Asian and developing world nations are still engage in real, actual trade, where China is rapidly and aggressively becoming the world's hub. 

More from The Australian:

Former ambassador to China Geoff Raby, now a Beijing-based business figure, told The Weekend Australian: "The value of such a deal would be substantial for exporters to China, especially those that import a lot from China like mining companies, as it would remove business constraints including exchange-rate risks and transaction costs."


Businesses, like individuals when travelling, have to pay extra to convert currency since there are different rates for buying and selling.


So removing one step also cuts out the cost of paying for such a "spread".


Australia has undertaken significant lobbying for the deal and the direct conversion of the yuan, also referred to as the renminbi (RMB), is identified as a priority in the government's Asian century white paper.


"We have held preliminary discussions with the Chinese government to explore how soon direct convertibility can be practicably achieved," the white paper says.


"We are continuing these discussions, and also exploring other opportunities to work with China to support the internationalisation of the RMB."

Australia's banks increasingly arrange trade finance through Hong Kong, which has developed a special role as China's chief international finance centre.

Needless to say, China is eagerly looking forward to taking yet another bite out of the USD's reserve status.

New President Xi Jinping, a former Communist Party secretary of Shanghai, is a champion of that city's development as China's finance hub, and it is believed that the Prime Minister may fly there to sign the currency conversion deal.


Ms Gillard is expected to go on from Shanghai to Beijing, where she will open the third Australia China Economic and Trade Forum organised primarily by the Australia China Business Council, which will be bringing about 100 people from Australia for the event. Participants are likely to include Andrew Harding, Rio Tinto's new chief executive for iron ore; Warwick Smith, ANZ Bank's chairman for NSW and the ACT; Australian Trade Minister Craig Emerson and Financial Services Minister Bill Shorten; Gao Hucheng, China's Commerce Minister; and Gao Xiqing, the acting head of China Investment Corporation, the country's vast sovereign wealth fund.


The ANZ Bank has been a strong advocate of direct convertibility between the dollar and the yuan. Gilles Plante, the bank's chief executive in Asia, said in a recent report that in the last financial year, China accounted for 29 per cent of all exports and 18 per cent of imports, but the value of that trade denominated in yuan was less than 0.3 per cent.


He forecast that cross-border flows of funds would be liberalised "to support Shanghai's plan to build itself as a global financial centre. At the time the whole world is digging out opportunities from the rise of the yuan, Australia should not lag behind."


It was significant the liberalising governor of the People's Bank, Zhou Xiaochuan, kept his job during the reshuffle of China's leadership. He said last year at a conference: "The next movement related to the yuan is going to be reform of convertibility. We are moving in this direction; we need to go further, we will have some deregulation."

Most importantly, to China, Australia will serve as the Guniea Pig - should this experiment in FX liberalization work out to China's satisfaction, expect Beijing to engage many more trade partners in direct currency conversion.

Beijing appears to have chosen Canberra as its partner in this next movement for straightforward economic reasons, as Australia has become China's fifth-biggest source of imports and thus, the appropriate partner for the march of its currency.


Ms Gillard and President Xi Jinping may also during the visit establish a "strategic partnership" between the countries. This will enable Australia to catch up in status with a large range of nations.

Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives - both fiat, and hard-asset based - to the USD appear. And since there is no such thing as a free lunch, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future. 

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Passage's picture

Because these are big economies

A year ago, I was convinced that it was about Northern Europe vs Southern Europe. I am so wrong. It is Big vs Small. Look at the differences in ECB and IMF approach when it comes to bailing out various troubled member states of Eurozone. 

Good luck to those Euro states with economic size smaller the Greeks; Luxembourg, Slovenia, Malta, Cyprus, Estonia. Good luck to all the small countries in the world.

Good luck to their depositors. It is still about TOO BIG TO FAIL.

Passage's picture

Australia is welcoming and making it easier for the Chinese to swallow their mines.
1-2a week ago, China's Central Bank Chief Zhou Xiaochuan and his deputy mentioned that China imported about 400-500tonnes of gold annually and claimed that buying more will propel gold into higher territoriries.

So the Chinese will buy mines instead.

earleflorida's picture

lest you forget india's geography...

knukles's picture

Now, simple logic would dictate this being great for PMs and hard assets...for gold etc have been under pressure with the strong dollar recently. To wit, golds close to an all time high in Jap Yen
So, whatever
And don't forget to feed the fish

macholatte's picture

Was it Obama or Lenin who said thiese things:


The Capitalists will sell us the rope with which we will hang them.

The surest way to destroy a nation is to debauch its currency.

Destroy the family, you destroy the country.

A system of licensing and registration is the perfect device to deny gun ownership to the bourgeoisie.

Socialized medicine is the keystone to the arch of the socialist state.

We can and must write in a language which sows among the masses hate, revulsion, and scorn toward those who disagree with us.


--- Vladimir Ilyich Lenin


Shocker's picture

This is just another hit to the US dollar / US Economy.

Its only here and there, with replacing or no longer using the dollars but it adds up.

Interesting times we are in.


The Big Ching-aso's picture

Oh shitsky. The koi is about to hit the fan tan.

TwoShortPlanks's picture

For some time now on ZH I've been saying that Australia has more in common with China than America.

Walk down any street in any Aust city and you'll see/hear few Yanks, but tons of Chingaz.

No surprises here!

SafelyGraze's picture

this is all very good news

these dollars are coming online exactly at the right time to buy treasurys, thus assuring the continued bull market for us debt

CrazyCooter's picture

I know a certain little boy whose name rhymes with "en ernanke" who will be working really hard to clean his plate each night once all these dollar reserves start coming home.

Have to keep interest rates low, you know, to keep the little guy employed!



JustObserving's picture

Gold miners are selling at record lows with proven gold deposits selling at 13% of current gold price.  When gold miners are expensive, the gold reserves sell for 38% of gold price.

Gold miners are a big bargain now and so are silver miners.  It would be stupid of China not to buy them with their $3.549 trillion of reserves (Dec 2012).  They officially have only about 1000 tons of gold worth about $50 billion now. But they announce their reserves only once every 5 years.  So their official number is dated.  They may announce updated gold reserves in 2014.

Passage's picture

I suppose this is a very positive for the Austrialian miners, BHP, Rio Tinto, Newcrest, Fortescue etc

They have been dropping while Dow and S&P surged to greater heights this year.

CrazyCooter's picture

Short with the pension funds, buy with the prop desk.

Roger Roger. What's our vector Victor?



DosZap's picture

They officially have only about 1000 tons of gold worth about $50 billion now. But they announce their reserves only once every 5 years.  So their official number is dated.  They may announce updated gold reserves in 2014.


Multiply that by at least a factor of 10-15.

smlbizman's picture

j. o.....i find your commet quite are making comments that would apply, if we had a sorta honest market.   if you have not watched the recent video posted here earlier by grant williams, take the time and do would see were im coming from.....fundamentals are for dead and will not matter again until the end, and im not talking paper fundamentals of mining stocks......cypris is a preview that really shows how it will get for the peons everywhere eventually.......we are all  cypriots now....

tango's picture

Your are right...and wrong.   Yes, securities are being driven by endless flows of debt dollars but the winners are still those that make money and are well-managed - Google, Samsung, IBM, Blackrock, food, energy.   Even the least plausible sector - retail - is still doing well because we have reverted to debt world.  Plus, companies that do not meet expectations fall.  One formula for success is simply buying the energy and food sectos spiders with PMs for a hedge.    

Stocks are trading "normal" (if profits are the prime mover) except with a steroid booster and this skews everything.  What is really whacked is the bond market.  It is on the tip of the tip of an enormous bond bubble that will someday burst with catastrophic consequences.  But then, so will the retail sector, the pension plans and social seurity.     

fomcy's picture

"It is still about TOO BIG TO FAIL."

Yeap, Too BIG to Jail.

TraderTimm's picture

Fixed that reserve currency chart for you:


It is going to be fun watching the central banks run around like chickens with their heads cut off.

bank guy in Brussels's picture

Alt currency dept. -

Karl Denninger - computer geek as well as ZH-copying financial pundit - just wrote a long and persuasive piece, absolutely rubbishing bitcoin, including legal risks particularly in the fascist USA, noting how it has aspects of a pyramid-like scheme to benefit its founders and early adopters:

'BitCon: Don't'

orez65's picture

Bitcoin is no different than the Federal Reserve, they are both fiat money scams.

Don't people learn????

DYS's picture

Not true. Bitcoins must be mined by algorithmic computation. Federal reserve notes can be created with a few keystrokes. Also, the market for bitcoins is truely a free market for a finite commodity. In a way, bitcoins are a perfect replacement for gold, because they have no other use except as an exchange for fiat curency. Therefore, they are not influenced by industrial demands. The combination of finite resource combined with open market makes bitcoin a viable long term global currency solution.

Learn more about it, before spreading popular rumors.

CH1's picture

There is a massive info war against Bitcoin. Amazing to hear people calling it a Ponzi - they have no idea how utterly ignorant that statement is.

Anyway, maybe it gives me time to accumulate some of them. If they demand to be suckers, I'll take the other side of the bet.

gold-is-not-dead's picture

True, everybody's calling it ponzi, yet somehow all those fear mongers forget to mention that every other asset is hyperinflating in comaprision to btc, and will continue to do so untill all the accounting has been done.

JLee2027's picture

Turn the computer off and "bitcoin" is gone forever. It's not safe, and in fact is rather foolish. Silver and Gold, in the pocket or under the matress, that's all you can count on.

gold-is-not-dead's picture

yup, one should always have a piece of phyz, no question there... but how do you mean turn of the computers, you mean like kill the telco industry? perhaps burn all the books as well? And people with glasses should be expelled from society and if you own a bicycle you should give your umbrella back to others?

CrazyCooter's picture

If it works for you, great. You will be happy because it provides value to you. Personally, I would never accept it and would only accept it for wages in very desparate times. To each his own.




gold-is-not-dead's picture

EMP is useless for optical storage, only magnetic ones which are turned on would be in danger...

Mesquite's picture

re:EMP..(Solar or man-made..)

Ya..And all those low voltage, small gap electronics...

Like in all those PLCs that control the electric grid..

Then, when standby generators run out of fuel, there go the cooling pumps..

Then, there goes the nuclear fuel stability...

Then, oops, about what, 134 or so Fukushima type events...


Wonder how long the batteries last in all those various computers/server farms/data centers..

BitCoin..Oh yeah..

BooMushroom's picture

Good luck reading your optical storage without a power grid or a functioning computer.

DYS's picture

You can print out your bitcoins and keep a physical log of them.

JLee2027's picture

So bitcoin is a piece of paper with a claim.

Hmmm. Where have I heard that before?

Kirk2NCC1701's picture

The beautiful, hot, friendly ladies in south amer. are totally open to your bitcoins.  No FRN's (Fornicated Regulated Notes) needed.  Direct, peer-to-peer agreement.  How libertarian is that?  One to beam up!  ;-)

Smuckers's picture

Bitcoin is just a flavor of the month. 
Nothing to stop other cryptocurrencies (Litecoin, etc) from entering the currency market.

A currency backed by precious metals, requiring honest work to produce more of it - is what this ape-covered ball of dirt needs.


gold-is-not-dead's picture

bitcoin is protocol, all the subcoins are part of that bitcoin network... all the subcoins inital value derive from instruments of major bitcoin instance and where it was in that period of time when they were created, namecoin 1/50th part of a btc, litcoin 200th part etc...

Thinking of alternatives and how are they valued proactively is nothing but speculation since it is known how much of a fair value each inherit...

You can't just inflate in substance the protocol, because inital value comes from tech, time, and energy invested in each of the subcoins... just like silver or platinum didn't inflated gold, for each a labor input is required...

CH1's picture

A currency backed by precious metals, requiring honest work to produce more of it - is what this ape-covered ball of dirt needs.

They've been around since 1998, and you've evidently never touched them.

LongBallsShortBrains's picture

Tit coin?

Zit coin?

Pit coin?

Clit coin?

CH1's picture

Bitcoin is no different than the Federal Reserve

I nominate this for the most ignorant post of the day.

Why are you posting when you have no clue?

Kirk2NCC1701's picture

If the Gov Trolls are gonna trawl & spew here, they could at least use their stage name, like Baghdad Bob.

Curiously_Crazy's picture

Don't worry. If I had a dollar (or btc) for every post I've read on precious metals boards with someone stating the evils of bitcoin as rabidly as a religious nutter, only admit they had no idea of how it operates some 50 posts down the line and that it's not such a bad idea I'd be a rich man.

Ironically these same people then often end up not only buying btc but also buying bloody mining rigs too.

Bought my first ones under a cent each and have spent and rebought many a time since then. So no I'm definitely not in it for the 'fad factor' and nor am I in them to make money.


slightlyskeptical's picture

Bitcoins need to monetized if you have them.

Quinvarius's picture

I don't know who I want to shit on more, Denninger or Bitcoin.  At lest Bitcoin has good intentions.  Therefore, Denninger should be forced to eat my shit today.

Mr. Magoo's picture

"FUCK BITCOIN" I will keep my gold, silver and storeable food and my many talents to barter with, when an EMP attack comes your precious bitcoin will be worthless but I will still have all my physical assets unless of course I am dead then it wont matter anymore and I will be a true zero-hedger which says "On a long enough timeline the survival rate for EVERYONE drops to 0"

Kirk2NCC1701's picture

Q:  You can sell your AU for bitcoin in place A, and buy it with bitcoin in place B.  Where A and B can be anywhere on the planet.  For ANY amount that you decide or can afford.  How good and secure are you at doing the same with your bullion transport? No, didn't think so, Einstein.

Facts and Cognitive Dissonance is a real bitch, isn't it?  People are such fucking liars when they claim to "want the truth".  Bullshit!!!  What they really want is "the truth that is consistent with their world view".  God help the SOB who challenges their world-view.  That's like challenging their religion.  They will respond emotionally (regression, aggression).  Classic psychology 101 in action.

Gotta love the Psy Ops peons in action.

daveO's picture

Name calling always shows your ignorance. Silver and gold are tradeable in the 'real' world. Even if metals and bitcoins are outlawed by the gov., I can still barter w/ metal locally out of view of the Feds. There is an astronomical amount of illegal drugs being traded locally, but very few being traded online, for obvious reasons.  

Proud Peon.

TraderTimm's picture

Karl also took a steamy dump on owning Gold. And this was before the prices exploded. Not much of a 'oracle', is he?

mt paul's picture

denninger is  a sheep


he still believes 911

was building collaspe, due to fire...

FreeNewEnergy's picture

I'm not sure about Bitcoin, as I find it difficult to understand, and anything I don't understand I usually won't deal in. Gold is good, but difficult to use as a currency; silver is better, but still not widely used, though the PMs are a great store of value.

For purposes of what some may call arbitrage, I have been paying cash for soft porn magazines and videos and turning them over on ebay and elsewhere.

If it's not a currency, it's close. Has some store of value and a generally accepted exchange rate, i.e. A June 1998 Playboy magazine can generally be bought in bulk for under 50 cents and sold for $3 or more (even better outside the US). Other magazine in the same genre exhibit similar patterns.

It's not perfect, but, in addition to the obvious excellent mark-ups, there are great articles and excellent photography which people will pay for with good money.

My point - whatever it is I'm trying to get at - is that there are a lot of "currencies" around in which a savvy entrepreneur can make markets. Choose wisely, find a somewhat commoditized market with availability on one end and resale value on the other and the world's your oyster, no matter which currency one uses.

Good luck. We'll all need it.

daveO's picture

Barter, the original trade.

ManOfBliss's picture

Bitcoin is very easy to understand. There are just very few good tutorials on how it works.