Money Editor for NZ Herald

Currency trading with China no big help: expert

Until now businesses have had to convert either currency into US dollars first. Photo / Thinkstock
Until now businesses have had to convert either currency into US dollars first. Photo / Thinkstock

An agreement to allow direct trading of the New Zealand dollar with China's renminbi is more political than practical and won't save businesses much money, according to one currency expert.

Prime Minister John Key and China's Premier Li Keqiang announced an agreement on Tuesday night to allow direct trading of the currencies.

Until now businesses have had to convert either currency into United States dollars first.

Announcing the agreement, Key said it would make doing business with China easier by reducing the costs of converting between the two currencies and would stimulate trade and investment.

But Derek Rankin, managing director of Rankin Treasury, said he was sceptical about the deal.

"I'm not sure it will make a practical difference. It will be interesting to see if the banks pass on that saving."

Rankin said the US dollar would always be a guide to the exchange rate as the renminbi was tied to it and was only allowed to move in a 2 per cent band.

He said the amount of direct trading between the New Zealand dollar and renminbi would likely not be enough to shave the costs to start with.

"Maybe in the long run it will develop into a force."

Gerard Field, head of global markets at HSBC — one of three New Zealand banks licensed to provide the currency service — said exchange rate savings would depend on the business doing the transfer.

"If we are talking about a large amount of money the FX (foreign exchange) costs are quite low."

Field said it may mean Kiwi businesses are able to do a sharper deal when buying products and services in China because they are dealing directly in renminbi.

"They could go to the people they are buying from and say we will pay in renminbi — they know what the cross rate is and they know how much it is going to cost," Field said.

"It just adds a little bit more certainty into the equation." Field said liquidity and transparency would drive the price of the transaction.

"China wants to make it easier. It's all part of their push to make it a global reserve currency."

The US dollar is the current global reserve currency. But Rankin said he doubted the renminbi would gain that status any time soon.

"If you had your life savings would you be confident putting it on deposit in the US? It's got a legal system, a system of government. There's a pretty good chance it won't be nicked. I'd feel the same about London, Sydney ... but Beijing?

"That to me is the test of reserve currency status."

- NZ Herald

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