WELLINGTON New Zealand and China are in the early stages of negotiating the direct convertibility of each other's currencies, but an agreement is likely to be some way off.
The New Zealand prime minister's office has confirmed that the issue was raised during John Key's visit to China last month and preliminary work has started on a deal that would aim to cut the costs of doing business between the two countries.
At present, New Zealand businesses wanting to buy or sell yuan must convert their holdings into U.S. dollars, Japanese yen, or the Australian dollar, the only developed economy currencies that can be directly converted with the yuan.
"It's a signal of China's desire to do business with us and that is huge given they are the greatest consumer of New Zealand milk and meat products," said Westpac chief economist Dominick Stephens.
"It will make life easier for the transactor at the Chinese end...they clearly see themselves doing more business with us."
New Zealand's biggest trade partner, Australia, started direct currency convertibility with the yuan last month after nearly a year's negotiations.
Westpac Bank (WBC.AX) and the ANZ Bank Ltd (ANZ.AX) have been appointed as the market makers in the direct trade.
A New Zealand dollar-yuan convertibility agreement would complement the five-year-old free trade agreement between the pair, that has seen trade almost triple since its inception.
Trade between the two was NZ$15.3 billion in the year to April 30, with China the biggest seller of goods to New Zealand and its second biggest export market.
Direct convertibility would be also help to boost service industries, such as tourism and education, which are both growth areas.
Chinese tourist arrivals have leapt 31 percent in the past year, while more than 24,000 Chinese students - the largest source - are studying in New Zealand this year.
New Zealand and China are aiming for two-way trade of NZ$20 billion by 2015.
At present the only official currency link between China and New Zealand is a currency swap facility, worth 25 billion yuan or NZ$5 billion and set to expire in 2014, to cover possible market disruption making it difficult for transactions to be settled.
(Reporting by Gyles Beckford; Editing by Kim Coghill)