Unfortunate timing?

From yesterday’s World Today interview between host Eleanor Hall and The Lowy Institute’s Linda Jakobson on China-Australia relations and the new Foreign Minister, Senator Bob Carr. This interview was broadcast just before 1pm.

ELEANOR HALL: You have though lived and worked in China for two decades. Do the Chinese regard the Australian relationship as critical? I mean a lot is made of our middle power status as a bridge between the US and China. From your personal contacts how is Australia regarded?

LINDA JAKOBSON: To be honest I was struck by how little Australia really figures in the thinking of people dealing with foreign policy — with diplomacy, with strategic thinking — exactly because they don’t acknowledge Australia as a regional player that they need to engage with.

At the moment Australia is really looked upon as a country that sells resources to China.

From the Reserve Bank about 3.20pm, news of the first bilateral currency swap that China has done with an advanced Western country.

“Today, the Reserve Bank of Australia signed a bilateral local currency swap agreement with the People’s Bank of China (PBC). The agreement allows for the exchange of local currencies between the two central banks of up to $A30 billion or CNY 200 billion. It is for an initial period of three years and can be activated by either party.

“The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial co-operation. The agreement reflects the increasing opportunities available to settle trade between the two countries in Chinese renminbi (RMB) and to make RMB-denominated investments. It follows the decision by the Chinese authorities last November to allow convertibility between Australian dollars and Chinese yuan in the interbank market in China.”

That agreement on convertibility last November was the first with a major Western economy and the sixth globally (the rest were with Malaysia and Hong Kong, which is a region in China).

China has reached agreements on swaps with about 20 countries, but Australia is the biggest and most advanced economy to sign up. South Korea would be have been the previous major coup for the Chinese (and the swap line is larger, but then the South Korean won is also a lot more volatile than the Australian dollar).

It is a big deal. Australia might be a country that “sells resources to China”, but to China, it is a handy country close enough economically to expand an important tool that will help bring China closer to the rest of the world. Which is what the Chinese are doing with this swap.

And why is this important? Well China chose Australia before much bigger trading partners such as Japan, the US and Europe. And, China approaches its prospective swap partners (and initiates deals on currency convertibility),, not the other way round.

Australia is the trial run with the advanced West. It may never be used, but it now links Australia and China more firmly together.

For something as sensitive as the convertibility of its currency, China would have looked at the political, as well as the economic ramifications of such a move. Good links between China’s Central Bank and the RBA would have helped make the swap happen.

Making China’s currency fully convertible with all other currencies will more firmly integrate China into the global economy and financial system. It will take a long time, but this is an important first step.

Watch other Western countries approach China for similar arrangements: the biggie would be bilaterals (or the ultimate, a multilateral swap) involving China, the Fed in the US, the ECB in Europe, the Bank of England and the Swiss National Bank, plus the Bank of Japan.

In fact, China is said to be talking to the Bank of England and the Bank of Japan about a similar deal, but the one with Australia was more advanced and was signed on Beijing yesterday by RBA governor Glenn Stevens.