Diaoyus fallout sees China refocus RMB push to Australia, Canada

On June 1, direct trading began between the renminbi and the Japanese yen, a step which will play a significant role in the process of China's monetary internationalisation. However, the recent Sino-Japanese dispute over the Diaoyu Islands has affected economic and financial co-operation between these two countries, as well as the process for renminbi internationalisation.

Therefore, it has become necessary for China to seek direct exchanges between the renminbi and other major currencies. This means the Australian dollar and Canadian dollar will become significant priorities. China is an important trading partner of both Australia and Canada; at the same time, Canberra and Ottawa have been hoping to strengthen their financial co-operation with Beijing.

The direct trading of the Australian dollar and the renminbi has more economic significance for Australia than China. Since 2007, China has been Australia's biggest trading partner; today, it tops the charts for both Australian exports and imports. Last year, bilateral trade amounted to A$114 billion (HK$913 billion), accounting for about 23 per cent of Australia's total trade, two-thirds of which was Australian exports to China.

Therefore, when China allowed direct trading between the renminbi and the yen, parties in Australia immediately expressed hope that the Australian dollar would be the third currency to be used for direct transactions, after the US dollar and the yen. Wayne Swan, Australia's treasurer, said at a meeting in Hong Kong in July that it was hoped the Australian dollar would realise an early direct exchange with the renminbi, thus greatly reducing bilateral trading costs. In a subsequent visit to Beijing, he expressed this wish to China's senior leaders.

Compared with the volume of Sino-Australian trade, the volume of Sino-Canadian trade is smaller, at US$47.5 billion last year. At the same time, China has become Canada's second-largest trading partner and third-largest export market.

From 2009 to the end of last year, investment by Chinese enterprises in Canada totalled C$16billion (HK$126 billion), and it will reach more than C$30 billion if the China National Offshore Oil Corporation acquisition of Nexen is approved. With China's rising demand for energy and resource products, investment in Canada must continue to increase; if its currency can be directly traded, Canada will become more attractive to Chinese investors.

In addition, China and Canada can consider promoting the establishment of an offshore renminbi business in Toronto. One of the reasons Japan is willing to conduct direct yuan-yen trading is that Japan, in addition to trade and investment demand, is looking forward to boosting the Tokyo financial market and nurturing an offshore market for renminbi financial product transactions.

Hong Kong is already an offshore renminbi centre; London and Singapore have also shown great interest and have implemented a number of positive measures. Compared with London and Hong Kong, Toronto has a unique location advantage, as well as many other benefits such as being in a time zone which makes it convenient to do business with all of South and North America, a large international population capable of speaking Chinese, many financial institutions, and developed and efficient financial markets.

The local financial industry will benefit from great opportunities if offshore renminbi businesses are developed in Toronto. As renminbi internationalisation starts off, Toronto will create more opportunities for the local financial industry while strengthening its international capabilities.

During his visit to China in February, Canadian Prime Minister Stephen Harper mentioned strengthening financial co-operation with China, and Premier Wen Jiabao proposed exploring the feasibility of a Sino-Canadian free trade agreement.

Therefore, there would seem to be a sound political basis for the direct exchange between the Canadian dollar and the renminbi, and neither the Chinese nor the Canadian governments have reason to oppose the development of an offshore renminbi market in Toronto.

Canada is a G8 member while Australia is also a major developed country; their economies play a vital role in the global market. If China's economic development is to be sustained, Australia and Canada will need to provide it with numerous resources, energy and hi-tech products over the long term. Directly traded currencies will not only reduce the costs of trade, but will also promote bilateral co-operation and development in trade, finance, investment and so on.

The first landmark target for renminbi internationalisation is free convertibility worldwide. To trade directly with the currencies of major developed countries is an important step in reaching this target. In other words, after the US dollar and Japanese yen, the renminbi should aim to realise convertibility with the world's major currencies including the euro, the British pound, the Swiss franc and so on. Once this is managed, the goal of free convertibility will be largely achieved.

If direct trade with the Canadian dollar and the Australian dollar can be implemented quickly and smoothly, worldwide renminbi convertibility may be realised in three to five years. Optimistically, 2015 is not impossible.

G. Bin Zhao is co-founder and executive editor at China's Economy & Policy, the flagship publication of Gateway International Group, a global China consulting firm