size and relative stage of development integrating itself into a global financial system that is as complex and interconnected as we see today. there are, as professor eichengreen highlights in his paper, an array of challenges, risks and uncertainties inherent to china ’ s transition to an open, more market - based economy. in some ways the task for china is more difficult than it has been for other countries that have made this same journey, including australia. first, there is much more international scrutiny and the rest of the world has a very strong interest in the outcome. and second, china ’ s financial sector is already very large relative to gdp meaning that setbacks in the reform process could have significant effects on the broader chinese economy. that said, if australia ’ s experience is any guide, the journey can turn out to be a positive one. for us, financial reform and the integration of our capital markets into the global system delivered the basis for sounder macroeconomic policy, more diversified portfolios for australian investors and the development of tools for hedging risks. but the journey was not without its troubles and there was much learning by doing along the way. at the beginning, the risk management skills of the australian banks were inadequate to cope with a world in which there was much freer access to foreign capital and credit was no longer rationed. regulators were also ill - equipped to provide effective supervision. the combination of these institutional weaknesses and intense competition among banks manifested itself most prominently in a bubble, and eventual bust, in commercial property prices in the late 1980s. today, china is going through its own adjustment pains. but we should not forget that internationalisation of the rmb holds out the promise of the same benefits that internationalisation of the australian dollar has delivered for us here in australia. the effects will not only be felt in china itself, but throughout the world. amongst other things, the opening up of china ’ s capital account and the process of rmb internationalisation may well elevate the rmb to international reserve currency status. while this still looks to be some way off, it would represent a profound change in the nature of the international monetary and financial system. some of the potential impacts of all of this are explored for us in prasanna gai ’ s paper for this conference. some implications for australia i would now like to briefly touch on some of the implications of rmb internationalisation for us here in australia. it is perhaps stating the obvious to say that

the latter has a different logic – that of beating the market and collecting transaction fees. profits often come from counterparts instead of customers. the choice of where to draw the line between the deposit bank and the trading entity was aimed so as to enable banks to service the real economy in the best way possible. we concluded that allowing the deposit bank to provide non - banking clients with customerinitiated hedging services with basic instruments such as forex and interest rate futures and swaps as well as to undertake securities underwriting for them would leave sufficient room for deposit banks to service corporate customers and thus fulfil their role in financing the real economy. moreover, while seeking to correct the problems which result from the mixing of trading with deposit banking, we wanted to preserve the universal banking model at group level. hence, we would allow the separated entities to operate under the same roof. this would keep the trading units within the supervisory umbrella of the bank supervisors. it would also be less disruptive of the european banking market than a complete forced divestment of certain trading activities and would allow “ one – stop banking ” to continue where it is to the benefit of customers. our work was facilitated by the structural proposals which had been previously made in the us and the uk. the general orientation of all three proposals – the american volcker rule, the british independent commission on banking ( vickers ) proposal, which is taken forward in the form of draft legislation, and our proposal is similar. however, they do differ in some respects. [ page 9 : comparison of suggested structural reforms ] the volcker rule is the most narrow, but also most radical in that it targets mainly proprietary trading, and requires of banking groups to wholly divest their proprietary trading activities – they cannot be continued even in separate subsidiaries of banking groups. the vickers and high - level expert group proposals are wider in scope, seeking to regulate more trading activities than the volcker rule, but are in a sense less radical in the implementation of the separation as they allow separation in the form of subsidiarisation within the banking group. however, the uk government has proposed to give authorities reserve powers to call for full bis central bankers ’ speeches separation, meaning disallowing even the group structure, in case banks try to circumvent the ring - fence. the eu high - level group wants to separate not only proprietary trading in the narrow sense, but also market making. so, avoiding the difficult segregation of proprietary trading and market