Transcript of Question & Answer Session Australia's RMB Policies and Future Direction

[Inaudible] and his very good colleague Mark Patterson have successfully negotiated with Boao Forum, and will be bringing the Boao Asia Financial Services Conference to Sydney in 2015 … and signed that agreement last month. Now I actually have a question on liquidity because we talk about, this subject is very relevant for Boao conference next year. We talk about liquidity: RMB is only 1.4 per cent of global payment and US dollars is 42.5 per cent, and if you look at the liquidity for investment, the US dollars asset is in the region of $56 trillion. So global investors can invest in stocks and bonds and others, and $29 trillion for Euro and $17 trillion for Japan. But in China, RMB is the asset available for investment is only 0.3 trillion. How do we make this more liquid so it can truly reflect the cut from the international currency? Thank you.

Well there are two aspects of that. One is how do we get China’s currency more integrated into the global financial system so that liquidity that we see in other markets also exists with RMB? And that obviously is a process of, has to start with a process of liberalisation in China. The ultimate outcome here is a fairly open capital account and then markets develop and liquidity develops around that. So that’s really within the control of the Chinese authorities. I think, kind of, domestically, the swap arrangement that we have here should give people confidence that if you need to access RMB and there’s some dislocation in the market because of the existence of the capital controls, that you will be able to get RMB through the Reserve Bank of Australia, through the swap agreement. So that gives some certainty to people trading here that even if there is some disruption that causes liquidity problems here, that you will be able to trade in RMB.

I will ask one more question, then I will keep quiet, sorry. Traditionally, when a country is running a major import deficit, then they’re able to globalise the currency. If you look at US with massive imports, every day they add US dollars in the global market, but one of the problem with China, apart from having capital account control, it also runs a massive trade surplus. So as much as some of the Chinese companies, where we have a joint venture in China, we run a 100 million RMB per month just on the payroll. And a lot of our Chinese companies would like to pay us in RMB, but we can’t use it. We can’t do anything that currency, so I’d like to hear your comment, then I’ll shut up!

Well I think ultimately capital account liberalisation solves that problem because if you have a capital account as a current account surplus and you typically have a capital account deficit, and there are financial flows offsetting the trade flows. And this is why I think ultimately capital account liberalisation is the solution here, because that makes, that opens up the possibility of two-way flows both for goods and services and for financial and other assets. And that ultimately is what happens for other currencies as well, and I think one day that will happen for the Chinese currency, and the difficulties people have now are really a result of the restrictions on capital flows.

Hi my name is Candice I’m and I have a question for Phil Lowe, if possible. I was just wondering in the context of liberalisation in China, Australia has often been seen as a proxy trade for China, do you see that changing in any way as we see further reforms there.

People say that we’re a proxy, or some people say we’re a proxy trade for China, I’m not exactly sure that that’s right. For me the broader issue is really what happens when the Chinese capital account liberalises. I mean, at the moment there are still very significant restrictions on the ability of Chinese citizens to buy foreign assets. And effectively what’s happened is that the People’s Bank of China has bought foreign assets for the Chinese citizens through the accumulation of foreign exchange reserves. Now as the capital account liberalises that model of internationalisation will inevitably change and the Chinese citizens and businesses will become the owner of foreign assets rather than through the PBC. I think that opens up a whole set of questions about what is the nature of those portfolio flows? Will the come to Australia or to other countries? And how will it affect the asset markets in those countries? And it’s quite possible given the restrictions that currently exist, if they were to come off, which I suspect they will eventually do, we’ll see a very large reallocation of the outflow of capital from China to other countries. And I think that will affect our markets and it’s going to be very interesting to see how that happens. And I think as that change occurs it’s going to open up really tremendous opportunities for financial institutions in Australia, because we have expertise to manage those assets that some Chinese citizens will obviously want to hold here. So I think for the people in the financial sector, I think there are tremendous opportunities here and the challenge you really face is how to tap into them. And as said before, all a central bank can do here is to create an environment in which you are able to do that with as few impediments as possible, and that’s really what we’ve been trying to do.