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China, Australia to allow direct currency trade

China and Australia will begin direct conversion of their currencies in a sign of growing business links, says Australian Prime Minister Julia Gillard

SHANGHAI - China and Australia will begin direct conversion of their currencies in a sign of growing business links, Australian Prime Minister Julia Gillard said Monday on an official visit.

"The Australian and Chinese currencies will be directly traded on the Chinese mainland for the first time," she told Shanghai's China Executive Leadership Academy Pudong, a Communist Party school.

China, the world's number two economy, is Australia's largest trading partner according to Canberra, spending billions on resources it needs to fuel its growth, while Australia is China's seventh largest partner.

The currency move allows the Australian dollar and Chinese yuan to be directly swapped without using the US dollar as an intermediary, making foreign trade settlement more convenient and cutting transaction costs.

"This reflects the rapid growth of our bilateral trade and the value of two-way investment -- and it also creates opportunities for new financial integration," Gillard said in a speech.

Analysts said the agreement marked an important step towards China's gradual moves to make the yuan freely convertible, with an eye towards rivalling the US dollar as a global currency.

"It's a necessary step towards internationalisation of the yuan," Jiang Shu, a Shanghai-based foreign exchange analyst at Industrial Bank, told AFP.

"It can reduce the dependence of Sino-Australian trade on the US dollar... which will further lift the yuan's global status and influence," he said.

At midday Monday, the Australian dollar was quoted at 6.4367 yuan on China's national foreign exchange market, where it trades.

The US dollar and Japanese yen are also directly traded with the Chinese currency. China's foreign exchange market started direct trading between the yuan and Japanese yen in June last year.