Fran O'Sullivan: China currency deal on the cards

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Convertibility agreement would be symbolic of growing trade ties and reduce transaction costs for exporters.

Chinese President Xi Jinping gave tacit approval for policy work to begin on a deal during his meeting with Key at last year's Boao forum. Photo / AP
Chinese President Xi Jinping gave tacit approval for policy work to begin on a deal during his meeting with Key at last year's Boao forum. Photo / AP

Will all the chess pieces be in place within the next week in time for China to announce full convertibility of the New Zealand dollar into the renminbi during the Prime Minister's visit?

That's the big question as John Key prepares to leave for Beijing late Monday night for what will be his fifth official visit since becoming Prime Minister in late 2008.

While there will be an element of symbolism to any convertibility deal, the rapidly mounting two-way trade between New Zealand and China means it makes sense for this country to follow in Australia's footsteps and notch a convertibility deal.

Such a deal has the potential to reduce the transactional costs for exporters and bring an element of certainty to the currency side of deals as New Zealand and Chinese firms trading with each other will not have to first convert currency into US dollars and then on into either renminbi or New Zealand dollars.

Expectations that China and New Zealand are close to announcing a deal were heightened by a recent visit by the deputy governor of the People's Bank of China, Madame Hu Xiaolian, to New Zealand.

Hu - who had been officially invited to New Zealand as this year's Prime Minister's fellow from China - is one of that country's most powerful officials.

Officially she is in charge of monetary policy at the People's Bank, which is a huge brief given the size of the Chinese economy.

While in New Zealand Hu made presentations to predominantly academic audiences on the future prospects for the internationalisation of the RMB and China's monetary policy framework and attended a briefing with key members of the financial sector hosted by the NZ China Council.

The question of just when China will announce full convertibility of the New Zealand dollar with the RMB was inevitably raised during the Hu meetings.

She is understood to have played a cautious hand.

But behind the scenes there has been action aplenty since President Xi Jinping gave tacit approval for policy work to begin on a deal during his meeting with Key at last year's Boao forum.

Before the Boao meeting, Key had put full convertibility at the top of his priority list with China. It's fair to say, the Prime Minister had been miffed that Australia had stolen a march on New Zealand on this score.

On his way up to the forum he had read a Treasury briefing and became more bullish on the issue after being placed next to one of the most powerful of China's Cabinet ministers - Xu Shaoshi, who chairs the National Development and Reform Commission - at a luncheon hosted by the President for visiting leaders.

The People's Bank of China granted licences to Westpac and ANZ to be the market makers in the direct trade of the Australia dollar and the renminbi.

And it is expected that both ANZ and Westpac will also be market makers when New Zealand follows the Australian model.

But there is also a possibility that a third player will be invited into the mix.

Speculation in financial circles is that additional player could be the Industrial and Commercial Bank of China which last month officially opened its New Zealand branch in Auckland.

ICBC chairman Jiang Jianqing did not directly allude to full convertibility during his official launch speech but he did indicate an expectation that ICBC NZ would quickly be a significant player as two-way investment between the two countries grows on the back of the fact that China is now New Zealand's largest trading partner.

ICBC NZ's board is chaired by former Reserve Bank Governor Don Brash.

Key is understood to have had a private meeting with Jiang during his visit.

It will be a coup if both country's respective officials can manage to get the deal in place in time for the Prime Minister's visit. Particularly as the policy work and approvals would have had to be given within a substantially shorter timeframe than it took for Australia to get its own arrangements in place.

Key's trip has long been portrayed as an opportunity to heal any lingering wounds over last year's botulism scare which strongly affected the credibility of the New Zealand dairy brand within China.

The scare turned out to be the upshot of a false-positive test.

But the discussions on convertibility of the respective currencies make clear the relationship is much larger than simply a dairy play.

That said it is true to say the botulism scare did cast a shadow over dairy co-operative Fonterra's exports to China. In particular, the base infant formula which it made under contract for major players like Danone which markets the Dumex brand in China, and, Nutricea with its Karicare brand.

The topic will also be to the forefront during discussions that the Prime Minister will hold with the Chinese leadership and in side-talks with Fonterra and its counter-parties. And during a meeting with many of the NZ infant formula manufacturers and their buyers who are travelling to Beijing to leverage Key's visit to rebuild confidence in their products.

Key will also endeavour to reassure Chinese consumers as to the safety of New Zealand's dairy products in what is possibly another "first", a press conference that he will hold with domestic media to explain the steps the Government has taken to strengthen food safety requirements.

The omens from the Chinese side for this visit are positive.

- NZ Herald

Fran O'Sullivan

A columnist for the NZ Herald

Fran O'Sullivan has written a weekly column for the Business Herald since its inception in April 1997. In her early journalistic career she was a political journalist in Wellington and subsequently an investigative journalist who broke many major business stories including the first articles that led to the Winebox Inquiry in both NBR and the Sydney Morning Herald. She has specific expertise in relation to China where she has been a frequent visitor since the late 1990s. She is a former Editor of the National Business Review; has twice been awarded Qantas Journalist of the Year and is a multiple winner of the Westpac Financial Journalism Supreme Award.

Read more by Fran O'Sullivan

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