Direct trade with China should help Australian exporters and investors

There is no doubt that China is one of the world's most powerful economies or will soon become one. As China grows into its role as a dominant force in the Asia-Pacific area, it will be making steps to further the use of its currency, the renminbi.

The Chinese currency, designated the RMB and measured in its principle unit, the yuan, is projected by some to become one of the world's dominant reserve currencies. In March this year, in its Submission to the Financial System Inquiry, ANZ expressed the following:

"The rise of the Chinese renminbi capital markets is a clear example of this Asian financial transformation. ANZ expects the Chinese currency and capital markets to dominate regional financial markets within 15 years, with the RMB rivalling the USD as a global reserve currency."

Ties to Australia

A memorandum of understanding signed by Tony Abbott and Xi Jinping on 17 November will see transactions between Australian and Chinese entities being processed directly in the Chinese currency.

Not only will companies in both countries be able to transact in the Chinese currency, but Mr Xi has also given the nod to investment by Australian-domiciled approved financial institutions into China's bonds and equities market, according to an official statement by the Reserve Bank of Australia (RBA) on 17 November.

In that statement, the RBA commented on the effects for both nations:

"These initiatives will serve to further support the economic and financial linkages between Australia and China by facilitating the use of RMB in cross-border trade and investment transactions. They also represent important steps in further strengthening bilateral financial cooperation between Australia and China."

The flows of investment

It could easily be expected that increased trade and an easier flow of currency between the two countries will have a very broad effect. The New York times reported on 17 November that industries from coal mining, to wine making and even dairy will see substantial decreases in the tariffs applied to their products in the Chinese market in the coming years.

The free trade agreement, which Prime Minister Abbott described as a "landmark" piece of legislation, will make more than 85 per cent of Australian goods exported to China tariff-free. Within four years this will rise to 93 per cent, and upon full implementation of the agreement, 95 per cent of Aussie goods will be free of duty going into China, according to a 17 November government release.

The implications for domestic and foreign investors in the real estate market are clear. Australia could be well placed to benefit from increased direct investment in the housing market, which should increase available stock levels.