The AFR has a bunch of stories celebrating what appears to be an imminent deal between Australia and China to enjoy direct currency convertibility:
Australia is positioning itself to become the third country allowed to directly convert its currency to the yuan, a move that would lower transaction costs for Australian miners and importers.
Treasurer Wayne Swan will push Australia’s case at a conference in Hong Kong on Wednesday and raise the issue when he meets Chinese leaders in Beijing later in the week.
China surprised many by suddenly allowing the Japanese yen to be converted directly to the yuan last month. Previously, only the United States had such rights, a reflection of China’s historical caution about liberalising its financial system.
Australian companies wanting to buy or sell yuan must convert their holdings into US dollars or yen first, a process that increases costs.
China wants to move away from the US dollar as a reserve currency and is aiming to have 30 per cent of foreign trade settled in yuan by 2015, a threefold increase from now. To achieve this target, it needs to relax foreign exchange controls.
One question that wasn’t asked in the rush of celebration was is this in the national interest? Of course, there’s the simple inertia of the Chinese push to global convertibility which makes the question academic but that doesn’t mean we shouldn’t ask it.
There are some quite sticky questions over the long term when this is thought through that make the goal of reducing transaction costs for miners and importers pretty minor.
The two biggest questions are what does this do to our economic relationship with China and what does it do to our strategic relationship with the United States?
On the first, the AFR article briefly touches on implications:
“It makes sense because Australia and China have a highly complementary trade relationship.”
Mr Li-Gang said the next step after direct convertibility would be for Australian companies to raise finance in yuan, including on Hong Kong’s Dim Sum bond market. “We could eventually see the yuan becoming a financing currency for Australian infrastructure,” he said. “The yuan raised could also be used to directly import equipment from China.”
…Tade between Australia and China was $114 billion last year. Nearly two-thirds was Australian exports. Australia’s big trade surplus is often raised by China. Allowing direct conversion of the yuan with the dollar may help address this issue.
Without putting too fine a point on it, why on earth would we want to correct this imbalance? Australia runs trade deficits with just about everyone other than a couple of North Asian nations:
So, if we’re talking theoretically, why would we want to encourage a correction in this imbalance? This, in turn, gestures at a larger implication of Chinese convertibility. One of the primary reason to float the Chinese yuan is to help rebalance its economy away from its export dominance and towards greater consumption via a rising currency. This will go hand in hand with a move away from fixed asset investment to boost the consumption share of GDP. It can only result in falling commodity prices.
Of course one can, and probably should, argue that such an adjustment has to happen anyway and it’s better to do it in a controlled fashion than in a crisis. But that does assume that you agree it has to happen, which very few offical Australian economists seem to agree with.
The biggest question of all is our relationship with the United States. A fully floating yuan is, by definition, a developing reserve currency. It is immediately a strategic competitor with the US dollar and will seriously diminish the special powers enjoyed by United States Treasury and the military machine that it funds. In a world with a fully floating yuan and functional euro, US bonds will simply lose their appeal and the nation will be held to yardsticks of fiscal rectitude that it has been able flout for generations of global policing.
The state of the US Budget is already (probably) only one decent war away from crisis and, in a world of yuan convertibility, the decline of US hegemony can only accelerate.
I mean sure, we might be happy to ingratiate ourselves with a new Great and Powerful Friend to the north, but somehow I don’t think that when push comes to shove we we’ll be so very happy about.
Much of this is irresistible of course but it might be useful if we considered some long term planning beyond a revolving shift of marines marauding through the Darwin red light district and making things cheaper for miners.
