Diplomatic swap agreed for unfashionable renminbi

The central banks of China and Australia yesterday announced an agreement for future currency swaps notionally worth up to CNY200 billion or A$30 billion.

According to the Reserve Bank of Australia's announcement, "The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms."

A second reason, the RBA said, is "to strengthen bilateral financial cooperation."

The prospect of either central bank activating this agreement over its three-year life seems slight given the lacklustre demand by businesses engaged in commerce between Australia and China to denominate their trade in the domestic currency of China.

Data released this week by the payments cooperative SWIFT shows that 1.9 per cent of all Australia's payments with China and Hong Kong were denominated in renminbi in February 2012. The month before the ratio was three per cent.

There are some precedents for the form of currency swap agreement announced by the two central banks yesterday.

One between the People's Bank of China and the Hong Kong Monetary Authority (which took into account the separate currency in China for Hong Kong) was put to use in late 2011 to alleviate a shortage of liquidity in renminbi.

A number of other such agreements are in place, though not yet put to use, between the central banks of China and those of Japan, South Korea, New Zealand and Dubai.