Philip Lowe: Australia's RMB policies and future direction
Introductory Remarks by Mr Philip Lowe, Deputy Governor of the Reserve Bank of Australia
at the RMB Internationalisation Roundtable, Sydney, 23 July 2014.
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I would like to thank Michelle Wright for assistance in the preparation of these remarks.
I would like to thank David Olsson and the RMB Working Group for organising today's
Roundtable. It is very encouraging to see the ongoing interest in the topic of RMB
internationalisation from both government and business leaders. The Reserve Bank is a
strong supporter of the work that is going on and I am very pleased to be able to participate.
For anyone interested in international trade or global finance, understanding the issues we
are talking about this morning should be very high on their agenda. As I have said before, the
internationalisation of the Renminbi (RMB) and the accompanying process of capital account
liberalisation in China could well turn out to be one of the seismic events in global capital
markets over the coming years.1 Ultimately, this process could see Chinese citizens be able
to hold internationally diversified portfolios, just as the citizens of many other countries are
already able to do. It could also see citizens from other countries able to buy and sell
Chinese financial and other assets with far fewer restrictions than are currently in place. And
it could see the Chinese currency become one of the world's most actively traded. If these
things do come to pass, then they would reshape the nature of global capital flows and the
international financial system, just as China's entry into the global trading system reshaped
global trade and production.
As Australians, we have more than a passing interest in all of this. China is our largest
trading partner and our financial linkages with China, while still relatively small, are growing.
And by virtue of being a small open economy with an already liberalised capital account, our
markets will be affected by changes in global capital flows. So understanding what is going
on here is important. This is true not just for those involved directly in the financial sector, but
for our society more broadly.
I have had the privilege of participating in the first two Australia-Hong Kong RMB Dialogues,
the first in Sydney last year and the second in Hong Kong quite recently. From participating
in these dialogues my sense is that we are making progress and David Gruen in his remarks
has outlined some of the examples. More businesses are genuinely interested in exploring
the advantages of having trade invoiced in RMB. The financial infrastructure that supports
this trading is gradually being put in place. And some of the stumbling blocks and
misperceptions are being eroded.
There is, though, much further to travel on this journey. Currently, less than 1 per cent of
Australia's merchandise trade with China is invoiced in RMB. For China, around 12 per cent
of total merchandise trade in 2013 was invoiced in RMB, although we estimate the number
was around 3 to 5 per cent if trade with Hong Kong is excluded. These figures suggest that
there remains significant potential for growth in RMB trade invoicing, not only by Australian
firms, but by firms in other countries as well.
Australia's own experience with liberalisation is that the growth of trade makes financial
liberalisation easier. As financial markets develop to support trade relationships, those same
markets can, in time, support deeper financial relationships. Trade helps deepen financial
markets, and deeper financial markets make it easier to liberalise. In the end, though, how
long this whole journey takes in China is largely dependent upon the pace of reform by the
Chinese authorities.
It is, of course, also dependent upon the speed with which the financial sector is able to
respond to any new opportunities. In part, the development of the appropriate markets
depends on commercial decisions made by financial institutions. The Reserve Bank is
seeking to play a positive role in this area, partly through helping create a constructive
environment in which these decisions can be made. Given this, I would like to spend a few
minutes outlining the various elements of our work in this area.
First, we have sought simply to better understand how the RMB markets operate. In
particular we have sought to understand: the nature of the existing arrangements and
products; any impediments to the development of an RMB market in Australia; and how the
RMB market sits within the broader financial system. Our representative office in Beijing has
been helpful here as have the frequent trips by RBA staff to China. We have also worked
closely with the financial sector in Australia, including with the RMB Working Group and have
been involved in two separate surveys of corporates' attitudes toward the use of RMB.2
These efforts have helped us develop a deeper understanding of the issues, as well as
understanding in the broader financial community. The joint work has also assisted in
providing a forum to support and to coordinate industry-led discussions and initiatives.
Second, the RBA has invested some of its foreign currency reserves in RMB. First and
foremost, this portfolio shift reflects the growing importance of China in the global economy
and the broadening financial relationship between Australia and China. But it has also
allowed us to deepen our own understanding of developments in Chinese financial markets
and the RMB. Currently, around 3 per cent of our net foreign reserves are invested in RMB.
Third, is the bilateral local currency swap agreement between the RBA and the People's
Bank of China (PBC). This swap, which was signed in 2012, allows the two central banks to
exchange their local currencies for mutually agreed purposes. The key benefit of the swap
agreement is to provide confidence to the Australian market that RMB liquidity will be
available through a "backstop" channel in the event of some disruption to the market for
RMB. The swap is not meant to provide a "cheap" source of RMB funding to the Australian
market in normal times. Its existence, though, should be helpful for market development, as it
provides market participants with greater confidence that RMB will be available in Australia
during times of dislocation. Since the swap agreement was signed there has not been a need
to activate it, although it could be used should it be required.
Fourth, the RBA is currently working with the PBC on future RMB clearing and settlement
arrangements, in particular the establishment of an "official RMB clearing bank" in
Australia. In keeping with the process that has recently been followed in a number of other
jurisdictions - including London, Frankfurt, Paris, Luxembourg and Seoul - this would involve
the signing of a Memorandum of Understanding between the RBA and the PBC, and the
designation of an official clearing bank in Australia. It is important to note that the RBA would
not expect to play a significant role in choosing which particular bank would be designated -
this is, quite rightly, largely a matter for the Chinese authorities. In terms of timing, we are
hopeful that an official RMB clearing bank could be designated over the coming months.
The concept of an official RMB clearing bank is one that is sometimes open to some
misunderstanding, so I would like to spend a few moments setting out how these institutions
operate. In essence, their key function is to facilitate cross-border payments and receipts of
RMB for trade-related purposes on behalf of other financial institutions in the local market.
Of course, Australian importers and exporters are already able to make and receive
crossborder RMB payments through a number of existing channels. For example,
Australianbased banks can facilitate cross-border RMB trade transactions through correspondent
banking relationships with banks in mainland China, or through RMB clearing "services" that
are offered by Australian-based Chinese banks via their mainland Chinese Head Offices.
Similarly, these transactions can also be effected through other offshore RMB centres, such
as Hong Kong.
In fact, the differences between an official RMB clearing bank and the channels that are
already available are quite subtle, though still important. In essence, official RMB clearing
banks are afforded more direct access to China's onshore RMB and foreign exchange
markets than other offshore institutions. More specifically, official clearing banks have direct
access to China's interbank RMB payments system and receive a quota to transact in
China's onshore foreign exchange market. These changes also entail more direct access to
RMB liquidity from the PBC.
While an official RMB clearing bank would not directly increase the range or type of RMB
transactions that are permitted to take place between Chinese and Australian entities, it
would improve the efficiency of cross-border RMB transactions, for example by potentially
reducing payment delays and/or reducing transaction costs. And, over time, the presence of
an official clearing bank could encourage local financial institutions to offer a broader range
of RMB products to the local market than is currently available.
Given the way in which the Chinese authorities have chosen to liberalise trading in the RMB,
these clearing banks are playing an important practical and symbolic role. Indeed, the
establishment of a clearing bank in Australia would help ensure that we are well positioned to
participate in the next stages in the process of RMB internationalisation. Ultimately, though, if
China does follow the general path travelled by a number of other countries, these clearing
banks are likely to become less significant. In other currencies, alternative arrangements
exist for the clearing of cross-border flows, with financial institutions managing the liquidity
and risk issues without access to an official clearing bank. If this eventually turns out to be
the case for the Chinese currency as well, then there is likely to be a reduced need for these
official clearing banks. In the meantime, they are an important stepping stone on the path to
a more internationally integrated Chinese currency.
Finally, a fifth step that we hope to take soon is to obtain a quota for Australian-based
financial institutions to invest in mainland China under the Renminbi Qualified Foreign
Institutional Investors (or RQFII) scheme. Following the granting of a RQFII quota to a
specific jurisdiction, financial institutions operating within that jurisdiction can apply to the
Chinese authorities to obtain an individual investment quota. Approved institutions can then
invest their own quota in selected mainland Chinese bonds and equities using RMB obtained
in the offshore market. In this way, the RQFII scheme can be thought of as representing both
a partial relaxation of controls on inward portfolio investment to mainland China and as a
means of developing the offshore RMB market.3 An RQFII quota would therefore represent
an important next step in facilitating cross-border RMB-denominated investment transactions
between our two economies. And, as Australia has a relatively large and sophisticated
private funds management sector, there is significant potential for growth in this area.
So, in summary, a lot has been happening, both in the public sector and the private sector. I
regard it as very much in our collective interest to continue this work. The changes that could
occur in the Chinese financial system over the coming years have the potential to be felt
around the world. To benefit from these changes, we need to understand them and be
prepared for them.
Much of the work that we have been doing has been aimed at identifying and reducing
potential impediments to the development of RMB business here in Australia. But once those
impediments have been removed - and we are moving closer to that point - the
development of the market is very much up to the private sector. Ultimately, in order for the
RMB market in Australia to flourish, Australian corporates must be able to identify a clear
business case for paying, receiving, lending, borrowing and investing in RMB. Over time, I
think this will happen, but there is more work to be done.
Thank you.