China and Australia to launch direct currency trading - source

SHANGHAI, April 3 Wed Apr 3, 2013 2:21am EDT

SHANGHAI, April 3 (Reuters) - China and Australia will launch direct trading between the two currencies in Shanghai and Sydney within weeks to lower trade transaction costs, a foreign bank source with direct knowledge of the matter told Reuters on Wednesday.

The new currency deal will eliminate the spread between U.S. dollars and Australian dollars from the cost of converting between the yuan and the Aussie dollar.

China has launched other new currency pairs in recent years , including with the Canadian dollar, Malaysian ringgit, and Hong Kong dollar, but the exchange rates for these pairs are still calculated based on the corresponding U.S. dollar rates.

The countries will announce the move on Friday during the visit of Australian Prime Minister Julia Gillard to China, which will begin at the Boao Forum for Asia on China's Hainan island.

Direct trading will begin soon after the announcements and no later than the first half of this year, the foreign bank source said.

"Considering heavy flows of mining transactions between China and Australia, the launch of direct Australian dollar-yuan trading will be significant move to reduct costs of both sides of mining trade."

China is Australia's biggest trading partner, with combined two-way trade of $120 billion.

Even after direct AUD/CNY trading is launched, corporates may still find it cheaper to conduct trades through the U.S. dollar, since liquidity will be much greater.

The two countries' central banks signed a bilateral currency swap worth A$30 billion or 200 billion yuan ($32.27 billion) last March, but the facility has never been used.

The launch of the new Australian dollar-Chinese yuan currency trading pair is another small step in China's campaign to increase international use of its yuan.

"For China alone, it will also be a major step towards regionalising and eventually internationalising the yuan by making the yuan direct tradable with major global currencies," the banking source said.

Japan and China launched direct yen-yuan trading in a similar agreement last June. The yen is currently the only currency other than the US dollar with which the yuan trades directly.

The Chinese yuan is not fully convertible under the capital account, but China has moved aggressively to promote yuan internationalisation in recent years.

The measures include enabling China-based firms to settle foreign trade in yuan, promoting foreign direct investment using yuan, and the launch of officially-sanctioned offshore yuan trading in Hong Kong and Taiwan.

The Australian newspaper previously reported the planned announcement without naming sources.

A spokesman for the China Foreign Exchange Trading System, which oversees China's onshore forex market, declined to comment and the People's Bank of China did not respond to faxed questions. The Reserve Bank of Australia, Treasury department officials and the Treasurer's office all declined to comment. ($1 = 6.1986 Chinese yuan) (Additional reporting by Rob Taylor in CANBERRA; Editing by Eric Meijer)