China Business: David Green: Benefits in currency deal

New Zealand joined a privileged few nations when it won an agreement with China last month allowing banks to directly trade the two national currencies. The deal carries with it the potential of greater economic, trade and investment benefits, building on the success of the past five years.

The new arrangement recognises the scale and expected growth in trade, capital and immigration flows between New Zealand and China and demonstrates the strong relationship between the two countries.

New Zealand companies have been able to convert China's currency, the renminbi (RMB), into New Zealand dollars (NZD) via other currencies for the past two years. Aside from allowing them to better manage currency exposures, the ability to pay suppliers in China directly in RMB has made those companies easier to do business with, and many have benefited from improved pricing terms or new business.

As the largest bank in New Zealand, with the largest presence in China, ANZ has been connecting many New Zealand businesses with China and helping manage their RMB cashflows and exposures. We are already seeing direct convertibility increase the confidence of companies here about doing business in China.

The owner of one New Zealand-based engineering firm tells us this new capability has helped give him the impetus to grow his business, explore new opportunities in China and deal with a wider range of Chinese suppliers and customers.

As more businesses move to capture these advantages, direct convertibility will continue to play a key role in improving trade flows between the two countries.

The new arrangement announced last month resulted in ANZ, as part of a select group of banks, being granted a market maker licence for direct RMB/NZD trading by the People's Bank of China. It will allow those banks additional flexibility in how they hedge RMB/NZD flows in the international currency markets, which will help add to the growing liquidity in RMB convertibility, aid the continuing development of associated hedging solutions for New Zealand businesses dealing with China, and support a reduction in the associated transaction costs.

Being one of the first nations to secure a direct currency trading deal with China says a lot about New Zealand's close and growing ties with China.

The currency deal builds on a number of other significant successes. In 2008, New Zealand was the first developed country to enter into a Free Trade Agreement with China, which has helped to remove barriers to trade and deliver significant gains for this country and its businesses.

China has since grown to become New Zealand's largest trading partner and is a key market for many of our major export industries, such as dairy, forestry, meat, seafood and wool. It is also a major source of migrants, students and tourists, meaning Chinese culture now makes up an important part of the fabric of our community; a further advantage supporting business connectivity with Asia.

On China's part, opening up RMB for direct trade with other currencies reflects a desire to internationalise the renminbi and speed up reform of China's financial markets.

A recent study published by ANZ places China at the heart of ongoing economic growth underpinned by a potential "revolution" in the development of Asian financial markets.

The report, Caged Tiger: The Transformation of the Asian Financial System, tips Asia's share of global economic output to soar, from 17 per cent two decades ago to 35 per cent by 2030 and over half by the middle of this century.

In China's case it notes that rapid industrialisation has until recently not been matched by extensive development of its financial system. Such development is expected to support and underpin the next phase of economic growth.

The Chinese Government has now recognised the urgency of reform and is fast-tracking financial liberalisation and the opening up of the domestic financial system to international capital flows. RMB convertibility plays an important role in this.

If China continues to pursue these reforms, ANZ forecasts that its financial system will be more than twice as big as the US system by 2030. By the middle of this century, China will account for half of Asia's financial assets. Shanghai will grow to rival New York as a global financial centre and RMB will dominate in Asia as a regional funding currency and as a genuine rival to the US dollar as a global reserve currency.

For the wider region, including Australia and New Zealand, this rise of China as a financial power points to a dramatic increase in cross-border investment, a growing supply of both equity and debt assets and the emergence of a new investor base.

This means it is more important than ever to be closely engaged with China's financial markets. The new currency trading deal, along with our FTA and wider relationship with China, means New Zealand and its businesses have a head start on most countries in capturing the benefits.

But in many ways the race is only just beginning.

As the pace of change and China's financial development accelerates we will need to be adaptable and redouble our efforts to retain our early advantage and capitalise on the growing opportunities in our region that will be increasingly attractive to others.

• David Green is Managing Director, Institutional, ANZ New Zealand.