AUSTRALIA is close to signing a deal with China that would allow the establishment of an official clearing bank for the yuan, a step toward the more open flow of money and investment into and out of the Asian giant.

    Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe said yesterday that the Australian central bank was working with the People’s Bank of China on a memorandum of understanding that would allow a clearing bank to be chosen “over coming months.”

    “Their key function is to facilitate cross-border payments and receipts of the yuan for trade-related purposes on behalf of other financial institutions in the local market,” Lowe said.

    Official clearing banks are afforded more direct access to China’s onshore yuan and foreign exchange markets than other offshore institutions, said Lowe.

    They have direct access to China’s interbank payments system and receive a quota to transact in the onshore foreign exchange market. These changes also entail more direct access to yuan liquidity from the People’s Bank of China.

    Setting up a clearing bank could lower transaction costs and reduce delays in payments for customers. China is Australia’s single biggest export market with two-way trade flows of around A$150 billion (US$141 billion) annually.

    So far, less than 1 percent of Australia’s merchandise trade with China is invoiced in yuan, allowing plenty of scope for expansion.

    Lowe said Australia also hoped to soon obtain a quota for Australian financial institutions to invest in China under the Renminbi Qualified Foreign Institutional Investor (RQFII) program.

    Approved institutions can then invest their own quota in selected Chinese bonds and equities using yuan obtained in the offshore market.

    “In this way, the RQFII program can be thought of as representing both a partial relaxation of controls on inward portfolio investment to the Chinese mainland and as a means of developing the offshore yuan market,” said Lowe. (SD-Agencies)