March 19 (Bloomberg) -- China started direct trading between the yuan and New Zealand’s dollar today as the world’s second-largest economy promotes usage of its currency in global trade and finance.
The move will help reduce foreign-exchange transaction costs between the two nations, the People’s Bank of China said on its website yesterday. The central bank set a reference rate for the currency pair of 5.2899 per New Zealand dollar today and yuan moves in Shanghai are limited to 3 percent on either side of the fixing. The onset of direct trading coincides with a visit to Beijing by New Zealand Prime Minister John Key.
“Direct trading with New Zealand will help boost the global usage of yuan through trade settlement and invoicing,” said Tommy Ong, executive director of treasury and markets at DBS Bank Hong Kong Ltd. “It will also contribute to lower transaction costs for companies since there’s no need to go through two currency pairs but one.”
Two-way trade between New Zealand and China surged 29 percent to NZ$18.86 billion ($16 billion) in the 12 months through January, government data show, with the Asian nation overtaking Australia to become New Zealand’s largest trading partner. Australia & New Zealand Banking Group Ltd., HSBC Holdings Plc and Westpac Banking Corp. received approval from the PBOC to act as market makers for the currency pair, the banks said in statements.
“Direct trading will increase the integration between the New Zealand and Chinese financial systems, and deepen the economic relationship between the two countries,” Key, a former head of foreign exchange at Merrill Lynch & Co. said in an e-mailed statement.
New Zealand’s growing trade with China means direct currency trading is important for businesses, similar to the situation with Australia, which started direct Aussie-yuan trade last year, said Hugh Killen, Sydney-based global head of foreign exchange at Westpac.
“Aussie-yuan trade continues to grow rapidly onshore in China, we’re talking billions of dollars a day now,” Killen said today by phone. “China and Australia and China-New Zealand are both long-term growth stories. China is a strategic market for Westpac in foreign exchange, so it’s central to us in terms of long-term opportunities.”
New Zealand signed a free-trade agreement with China in 2008, clearing the way for increased exports. New Zealand’s merchandise shipments to China jumped to NZ$9.97 billion in 2013, more than doubling since 2010, and accounting for about 20 percent of the smaller nation’s overseas sales, according to Statistics New Zealand.
Chinese demand for New Zealand’s exports helped drive the kiwi up almost 20 percent against the dollar in the past three years, the biggest advance among 16 major currencies. It reached 86.40 U.S. cents earlier today, the strongest since April 2013.
South Korea, which also counts China as its biggest export market, is considering seeking direct trading links between its currency and the yuan. Vice Finance Minister Choo Kyung Ho said on Feb. 18 that the government will support the implementation of direct trading if needed as demand for yuan expands in the financial markets and for trade.
China doubled the yuan’s trading band against the U.S. dollar this week to 2 percent on either side of a daily reference rate set by the central bank, a step toward giving market forces a greater role in determining its exchange rate.
The PBOC also keeps its currency within 3 percent of fixings against the euro, the British pound, the yen and the Hong Kong dollar, while a 5 percent limit applies to the Malaysian ringgit and the Russian ruble.
“Direct convertibility marks another milestone in the internationalization of the renminbi,” HSBC said in a statement on yesterday’s New Zealand dollar announcement. “Coupled with China’s recent move to widen the daily trading band of the renminbi, it further demonstrates the country’s determination to speed up its financial market reform.”
The yuan has retreated 2.4 percent from its 20-year high of 6.0406 per U.S. dollar reached on Jan. 14, after strengthening 2.9 percent in 2013. At least five banks including Barclays Plc and Bank of America Corp. have trimmed their yuan projections this week, citing concern economic growth is slowing and higher currency swings under a broader band. The yuan gained 0.02 percent today to 6.1910 in Shanghai.