Yuan clearing bank to open in Sydney

Move set to boost currency's globalization

China and Australia have agreed to set up a yuan clearing bank in Sydney, the two countries' central banks said Monday, marking China's latest effort to promote greater use of the yuan globally.[Special coverage]

The People's Bank of China (PBOC) and the Reserve Bank of Australia (RBA) on Monday signed a memorandum of understanding to establish yuan clearing arrangements in Australia, the PBOC said in a statement, adding that it will appoint a yuan clearing bank in Sydney.

The clearing arrangements will provide a more direct means of facilitating cross-border yuan transactions between Australian and Chinese entities than was previously available, the RBA said in a separate statement released Monday.

The PBC also agreed to grant Australia access to the Renminbi Qualified Foreign Institutional Investor (RQFII) program, with an initial aggregate quota of 50 billion yuan ($8.15 billion). This, according to the RBA, will allow approved Australian financial institutions to invest in the Chinese mainland's bond and equity markets using yuan.

The deal means that the RQFII quota has now been issued to nine countries and regions, and totals 770 billion yuan.

These initiatives represent important steps in further strengthening bilateral financial cooperation, and will facilitate use of yuan in cross-border trade and investment transactions, the PBC said.

The announcement was made alongside the completion of negotiations on a bilateral free trade agreement (FTA) between China and Australia, which will eliminate tariffs on a wide range of products and improve mutual access to services.

China is Australia's largest export destination, accounting for 36 percent of all Australian exports in 2013, according to official data from Australia. But at present, very few Australian businesses actually settle trade in yuan.

"We anticipate that we will see more financial activity using yuan as liquidity increases and the market embraces the benefits of dealing directly with a clearing bank in Sydney," Rob Whitfield, chief executive of Australia-based Westpac Institutional Bank, said in a statement sent to the Global Times Monday.

Whitfield said a yuan hub in Sydney will encourage a build-up of Australia-based yuan deposits, deliver larger pools of liquidity and stimulate market activity in yuan-denominated financial products.

The Sino-Australian FTA will strengthen the fundamentals needed to support bilateral financial flows, and will also contribute to the establishment of offshore yuan business in Australia, analysts with Australia and New Zealand Banking Group (ANZ) said in a research note sent to the Global Times Monday.

ANZ estimated that if 30 percent of bilateral trade is settled in yuan by 2020, it would represent payment flows of 300 billion yuan a year.

Furthermore, other capital flows such as foreign direct investment from Chinese enterprises, securities investments, immigration and other forms of remittance may also be denominated and settled in yuan, the ANZ analysts said.

Sydney is the latest to join other financial centers such as London, Frankfurt and Singapore to launch yuan clearing services, amid efforts by the Chinese authorities to promote the use of the currency globally.

The yuan has already become the seventh most-used global payment currency, with yuan payments accounting for 1.72 percent of global settlement as of September, according to Belgium-based global payment services company SWIFT.

"With yuan clearing being launched in more offshore centers in Europe, the Middle East, North America and Asia, we expect the volume of yuan settlement to see robust growth over the medium term," Liu Li'nan, a strategist with Deutsche Bank, said in a research note released Friday.