Australia's central bank plans to invest some of its foreign currency reserves in Chinese government bonds for the first time, part of a wider move to deepen financial ties with the country's biggest trading partner, a top central banker said on Wednesday.
Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe said the bank intended to hold around 5 percent of its foreign currency assets in China and had already gained approval from its Chinese counterpart, the People's Bank of China (PBOC).
The RBA's foreign currency reserves are currently worth around A$38.2 billion ($39.2 billion).
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"This decision to invest in China is an important one," Lowe said in a speech to the Australian Chamber of Commerce in Shanghai.
"It reflects the broader economic relationship between China and Australia and our increasing financial ties. It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets."
The Chinese yuan, once liberalized, is likely to become one of the major reserve currencies in the region, he added.
This will be the first time the conservative central bank will have invested directly in a sovereign bond market of an Asian country other than Japan.
The RBA's move comes at a time when China is aggressively promoting the use of its currency in international trade and following a relaxation of foreign investment quotas and easier access to the onshore Chinese markets.
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Lowe also highlighted the recent launch of direct trading between the Chinese yuan and Australian dollar, increasing investment flows between the two countries as well as growing interest in using the yuan for trade settlement.
Lowe, though, admitted there are barriers slowing the uptake of invoicing in yuan, or renminbi (RMB), including the lack of availability and pricing of instruments to hedge currency risks, a problem some companies have complained about.
"In time, it is likely that these constraints will be overcome: deep and liquid markets will develop, settlement processing will be improved and the appetite for invoicing in RMB will grow," he said.
Lowe also said a A$30 billion currency swap agreement that was established last year, will be available to all authorized deposit-taking institutions in Australia. If ever activated, the RBA would charge banks 25 basis points over the Shanghai Interbank Offered Rate (SHIBOR) to borrow yuan.
Lowe said while Chinese authorities have take steps to liberalize its financial markets, they remained highly regulated.
Drawing on Australia's own bumpy reform journey, Lowe said China could face an even more daunting challenge.
"Because of China's sheer size, the rest of the world is watching very closely and it has a strong interest in China 'getting it right'," he said.
Lowe highlighted some of the common problems shared by the two countries on the reform journey.
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He said Australia dealt with a 'shadow banking' problem by moving to a more liberalized system. On the currency, he said Australia experimented with almost every type of exchange rate regime before finally adopting a floating exchange rate and an open capital account.
"It is important though to point out that the process was far from smooth. Mistakes were made," he said.
"While these aspects of Australia's experience have some similarities with the current Chinese experience, China needs to, and is, charting its own course."