Transcript of Question & Answer Session Developments in Global FX Markets and Challenges in Currency Internationalisation from an Australian Perspective

Okay so we have about 20 minutes for Q&A so let me encourage everybody to think of questions to ask or comments that you want to make in response to both of our two excellent opening keynote speeches. So I’m going to begin, there were so many themes, I don’t quite know where to begin. So let me begin with the chart that Guy Debelle put up where he was pointing out, yes that one, the volatility. That as Australia deregulated the volatility on … The interest rate volatility declined, but the volatility got pushed into the foreign exchange market where the trade-off was viewed as more favourable from the authority’s perspective, so I don’t mean to speak for Guy, but that was my take away so that’s an important theme of you deregulate, there have to be protections to allow the transition to be a safe one. So Guy Debelle can I ask you, Australia went through this process as you described; any advice of the kinds of issues that you confronted maybe from a market perspective, maybe from a bank supervisory perspective, lessons drawn that might be useful for China in their context?

Deano I mean I would reiterate something Dr Gow just said and something I made in the speech. I mean, from our experience it was, there were people who had borrowed in foreign currency weren’t aware of the risk that they were undertaking and we had this experience in the late 80s early 90s where a large number of Australian farmers borrowed in Swiss Francs because they saw the interest rate as being low and then when the Australian dollar depreciated those loans were difficult for them to repay. So it’s actually just knowing that in a world of floating exchange rates there is actually that risk out there. And to some extent that was an education process, we don’t necessarily want to do it by a whole bunch of people suffering on the way through like the bit.

The other comment I suppose particularly given the recent Chinese history is there is making it clear people there is two way risk in the exchange rate, I would guess given the experience over the last decade plus in China where the RMB is broadly, has pretty much been a one way track upwards the need to hedge against the depreciation obviously wasn’t there but now that the exchange rate and particularly the cross against the US dollar is more market determined and is moving in both directions, the concept of two way risk needs to be made clear to particularly to those who are borrowing in foreign currency that they are taking on that risk. And again going back to something I said in my remarks is that the development of hedging instruments which allow people to protect themselves against that risk is a very necessary part of that safety net. And that very much then means that the exchange rate volatility that’s evident in that chart there isn’t having a material impact on people who have foreign currency exposures because they’ve hedged them and then that allows you to much more fully enjoy the benefits of the exchange rate as a shock absorber or a macro adjustment mechanism.

So if I could pick up that theme so and of course I mean this is a perfect segue because volatility of the exchange rate sort of begs the need for hedging instruments because you need to be able to hedge that move volatility that perhaps didn’t exist before because the government was underwriting that risk, now it’s being shifted into the commercial sector. So Guy any thoughts on why we haven’t had in the off shore market where there are by definition fewer restrictions we haven’t had a more active development of hedging instruments.

Well Deano I think it comes back to what I was saying earlier that actually up until August last year there wasn’t that much demand for it because the RMB was generally seen as as being roughly a one way bet. But now that there’s very … I think the authorities of the PPC have made people aware that it is now a two way risk out there that’s only a fairly recently phenomenon. I mean our sense is actually the take up of hedging instruments over the past sort of nine months or to a year or so has actually been reasonable so I think to some extent it’s been a lack of demand up until fairly recently just because there really wasn’t necessarily all that much need for it. Now as I said there was very much … It is clear that there is a two way risk and that the authorities are very much allowing that to happen I expect you’ll see the demand grow reasonably rapidly.

So that makes a lot of sense, to the extent that the government was providing the insurance before, now the commercial entities will have to, if you will, self-insure and find ways of doing that. Guy let me go to the global codes, you’ve been spending a lot of your time working on that so let me ask you a question and relate it back to China. So this is the first time such an effort has been tried, a true global code of conduct that will be applicable in all jurisdictions. So my question is there any kind of separation or at least recognition therefore some countries in emerging markets especially or transition economies such as China? Will that code make sense? Will it fit for a jurisdiction like China or is there some ways that you’re making allowances for such economies so that it’s suited for jurisdictions like this that are in transition?

So in terms of the group who are working on this I’d say we are roughly 50/50 emerging economies, developed economies, so there is a large input from emerging economies I mean some of these are not necessarily emerging anymore but Mexico, Brazil, India and as I said China is directly involved in our group both on the central bank side and also on the market participant side. When I talk to my counterparts in China they very much, it’s not that they see it’s directly applicable to the foreign exchange market in China right this minute, but I think they very much would regard it as a guide post in terms of where they would like the market to evolve too as the market continues to open up.

For markets that are very much integrated into the global foreign exchange market like Mexico or Brazil or Korea say, then I would regard what we’ve written as directly applicable, I don’t see anything in what we’ve got as inappropriate for those markets and indeed, it hasn’t been reflected in the input we’ve received from those countries. So, this is one thing to bear in mind we’ve articulated a whole bunch of principles of good practice if you want to put it that way in the Code, this is not a rule book, nor is it regulation, so in that sense I think it actually much more amenable to adoption in a variety of jurisdictions. As I said it’s not jurisdiction specific and for the same reason again I think it’s much more useful to a market like China which is integrating itself into the global economy than something which is much more rigid or much more rules based.

Yes the young lady in the front.

Thank you for that compliment Deano. As we have in the room people who cover the entire market, in the whole trade life cycle, people who are managing the risk and also the trading, developing and producing products and services in Renminbi, and also those who are managing the operations and payments and settlements attached to that. As we see that move and then internationalisation and the themes we’ve talked about today which is not only opening up but the need for further understanding of what’s ahead for the Chinese financial markets, what advice and guidance have you got for everybody in the room as to what we the community, the market need to do in order to support this development?

Thank you for that easy question Rachel. Okay let’s do 30 seconds each from our two panellists; Guy Debelle you go first.

I suppose I would say tread carefully, as I said at the end of my talk I think the gradual process and the well managed process that the authorities have had on financial liberalisation to date, I think it’s very clear I can understand why that is the case if you look at the experience of others including ourselves who have proceeded somewhat a little more rapidly. And so I think the fact that this is a sequenced and structured process of liberalisation I think has a lot going for it. But that which also means that it gives the market participants that you are talking about Rachel time to adjust as well, but at the same time those market participants have got to be aware of the opportunities that are created as the system is liberalised and change their practices as the system changes rather than sticking to the old ways of doing things.