SMEs to adopt yuan as RBA governor predicts Chinese currency domination

China’s currency is likely to become the most dominant in the Asia-Pacific and surrounding countries, including Australia, will have to undergo a “profound adjustment” to deal with the change, according to predictions from Reserve Bank of Australia governor Glenn Stevens.

However, local experts say the Australian dollar will remain unaffected, alongside a survey which shows more businesses believe China’s currency (the yuan, which is also known as renminbi) will become a prominent factor in doing business.

Stevens said in a speech yesterday to a finance forum in Sydney that the dominance of the Chinese yuan is “inevitable”, as the size of the Asian financial system continues to grow.

“Unless something serious goes wrong in China, the RMB [renminbi] will eventually become the dominant currency in the region,” he said.

“There could be a profound adjustment for many countries in the region from membership of what is, at present, a de facto US dollar zone, to membership of an RMB zone,” Stevens said.

This dominance, Stevens said, has already started with the establishment of direct currency conversion agreements with the Chinese yuan, but full liberalisation of Chinese capital is needed.

The governor’s comments came as a direct trading agreement between Australia and China was established earlier this week, allowing the two currencies to bypass the US dollar when trading, effectively reducing transaction costs and lowering the exchange rate.

OzForex Asia-Pacific chief currency and payments strategist Jim Vrondas told SmartCompany if the yuan becomes the dominant currency in Asia, the Australian dollar will be largely unaffected.

“Businesses in Australia which have been making or receiving payments from China have mostly done so with the USD, which has been the currency of choice.

“Overtime, I think the market in this area will move more toward RMB. So the biggest loser will be the USD, not the AUD, because more countries will be able to trade directly with China,” he says.

Vrondas says at the outset, large companies will be making the most transactions with China, but SMEs will also benefit from the direct trading agreement.

“SMEs will start to adopt the yuan as the preferred currency, although it also depends on the exporter in China and their preference.

“As the market matures and there is more price transparency, the margins importers and exporters into China pay for the yuan will change and there will be cost-savings benefits,” he says.

A survey conducted by the banks for the Treasury – ahead of a conference in Sydney today about the use of the yuan by Australians – found that out of the 47 companies surveyed only 35% of those trading with China used yuan for trade settlements, but 57% expected they would do so in the future.

The research also indicated 57% of the businesses thought the yuan would give them better trade terms, while 53% thought Chinese businesses would insist on using it, and 49% believed it would improve exchange rate risk management.

Vrondras says some small businesses could save up to 1% through the direct currency conversion agreement, with one of the biggest benefits being possible increased stability in conversion rates.

“One of the benefits of this direct access to the market is that it will help remove some of the volatility in the exchange rate, which will make it easier for businesses to forecast revenue streams and make it easier to plan for the future,” he says.