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China and Australia sign $31BN currency swap deal

The central banks of China and Australia signed a major currency swap agreement on Thursday, in yet another move by Beijing to boost the yuan as an alternative global reserve currency to the US dollar.

Yuan currency 2012 01 16Enlarge
China’s gradual relaxations of controls on the value of the yuan and on capital flows means that the yuan is set to become a major international currency. (AFP/AFP/Getty Images)

China signed a currency swap deal with Australia on Thursday, in a bid to support bilateral trade and investment and boost the yuan’s profile in developed markets.

The agreement, another example of the increasing internationalization of China’s currency, will allow for US$31.2 billion worth of local currencies to be exchanged between both countries’ central banks over three years, the Agence France Presse reports.

Thursday’s deal also underscores the close economic ties between China and Australia. China is Australia’s biggest trading partner and the main market for its iron, coal and gas exports.

In a statement, the Reserve Bank of Australia said: “The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial cooperation.”

The agreement is expect to lower costs for businesses, as they will be able to finalize trade terms in local currency, and marks the latest in a series of swap deals signed by Beijing in an effort to promote the yuan as an alternative international reserve currency to the US dollar.

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The People’s Bank of China has signed agreements with a range of other countries, including Hong Kong, Turkey, the United Arab Emirates and Malaysia, and there is talk in the market that the Bank of England could soon be in line for a currency swap with China, The Financial Times reports.

The deals have seen an increase of the amount of Chinese trade being settled in yuan instead of US dollars. But analysts say that the swap agreements need to be accompanied by bolder steps by Beijing to open up the country’s tightly controlled capital markets if the yuan is to become internationally acceptable as a global currency, according to the BBC.

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http://www.globalpost.com/dispatch/news/business-tech/120322/china-and-australia-sign-31bn-currency-swap-deal