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Make no mistake, the agreement enabling the direct conversion of the Chinese mainland and Australian currencies is a significant development in the evolving economic and political relationship between two of the key economies in the Asia-Pacific region. While the benefits may take some time to reach full fruition, the move will ease in time the path for increased two-way trade and investment between the largest and fourth-largest economies of the region.

Significantly, this should include businesses operating in the non-resources sectors, a notable departure from what has to date been the overwhelming dominance of mining - coal and iron ore in particular - in the nations' trade relationship.

The Australian government has been criticized, justifiably in part, for an approach to real long-term engagement with the region that is more academic than practical. The currency conversion development represents a small but important step toward correcting this perception.

The Chinese mainland is Australia's largest trading partner and allowing direct conversion of both currencies on the mainland, rather than requiring businesses to use the US dollar as an intermediary, should reduce transaction costs and reduce foreign exchange risks. However, the benefits of this reform will flow through gradually. Current arrangements for three-way currency conversion are quite efficient with well-developed risk-management products to help reduce currency risks, and many businesses are used to dealing in US dollars. Significantly, many supply contracts, such as those for iron ore and coal, are long-term and written in US dollars.

Direct conversion of currencies could also help promote investment between the two countries by reducing the currency conversion costs. Australia is a very significant destination for Chinese offshore direct investment. Further to this, in the longer term, given the magnitude of mainland-Australia trade, reducing the costs inherent in the three-way conversion process could result in considerable savings.

The fact that the Australian dollar is the third currency in which the Chinese government has allowed direct conversion, signifies Australia's status as a key trading partner. It also emphasizes Australia's importance to China and to the broader region.

This reform should also be seen as another step on the staged liberalization of the renminbi. However, I do not see the Chinese government straying from this gradual reform path given the potential ramifications to the economy of moving too quickly. If they are not doing so already, this agreement should prompt similar overtures from at least some of China's other major trading partners such as Brazil. Obtaining this agreement as a relatively early adopter, should deliver Australia some competitive advantage.

For Hong Kong, this announcement should essentially mean business as usual, perhaps with some further opportunities. Australian and Chinese businesses will continue to use Hong Kong as a place where they conduct business and to manage the flow of funds between the countries.

Allowing the Australian banks to undertake direct conversion is a positive development, not just for these particular banks but for other foreign institutions in their efforts to develop a presence on the mainland and break the control that has historically been held by North American banks.

There is value in this currency conversion deal. It will take time to flow through but will make a difference. The real significance is what the deal says about the genuine deepening of the commercial linkages between China and Australia.

The author is chief executive of CPA Australia.

(HK Edition 04/20/2013 page1)