of attention in the asian region and will once again come into sharp relief when the fed raises its policy rate. the increase in cross - border flows into emerging markets over recent years, particularly in the asian region, has contained a large amount of market - based finance. asset managers have a much higher share of emerging asia in their funds under management today than they did a decade ago. how stable are these flows likely to be in a more volatile environment? what is the behaviour of the investors who have allocated a higher share of their portfolio to emerging markets? how much of that increased share is a result of a search for higher yield which might reverse when yields in traditional developed markets increase? how much of it is a structural diversification into the emerging world as it has become a much larger share of the global economic and financial landscape? a major influence on the future path of financial integration in the asia - pacific region will be developments in chinese financial markets. china is on a path of financial deregulation and capital account liberalisation. almost no other country has managed this process without encountering significant problems. while china has endeavoured to learn the lessons from all the other countries that have gone down this path, including australia, it will be a significant achievement if they are able to pull it off without encountering some problems. investing in china ’ s domestic markets has become easier over the past year, with a range of new initiatives gradually opening the capital account, at this stage, primarily by allowing more portfolio flows between hong kong and the mainland. the new schemes expand the avenues for investing in china ’ s domestic debt and equity markets from the existing rqfii and qfii programs, which at the end of may accounted for around us $ 140 billion of foreign investment in china. the shanghai - hong kong stock connect scheme, which started in november last year, is at about half its northbound capacity of around us $ 50 billion. a shenzhen - hong kong stock connect is expected to be announced soon. the mutual recognition of funds agreement, effective from july, will allow fund managers registered in hong kong to offer investment fund products to mainland residents ( and vice versa ). from an australian perspective, these avenues should provide an opportunity for australian banks, asset managers and their clients to increase their exposure to the chinese domestic financial market. australian international portfolio investment has been growing strongly over recent years from around a $ 450 billion in 2010 to over a $ 750 billion at the end of 2014 ( graph 3 ). while the

the need for monetary policy to support current economic activity and bring inflation back towards 2 %, and speeding up the return to more conventional monetary policy settings. there are benefits for fiscal policy too. by lifting output and employment and lowering unemployment, reforms improve governments ’ structural balances. moreover, higher levels of potential output reduce the current overhang of public sector debt that is impinging on some countries ’ ability to carry out stabilisation policies. the greater fiscal space also enables governments to redistribute the benefits of reforms across the whole population. some reforms can have upfront negative distributional effects, which governments may want to offset. structural reforms also help fully unlock the benefits of the single market and thereby improve the cohesiveness of the monetary union. 1 increased convergence not only reinforces the integrity of the union. it also builds up the trust among member states that is necessary to take further integration steps. and finally, structural reforms make the euro area economy more resilient in the face of the disruptive influence of globalisation and digitalisation. all these reasons highlight the vital importance of structural reforms for the welfare and wellfunctioning of our union. let me now briefly consider the factors behind the euro area ’ s recent lacklustre productivity performance, before setting out some necessary steps for improvement. factors contributing to low productivity growth in the euro area there are two underlying sources of labour productivity growth. the first is the amount of capital available to each worker. raising investment is therefore a key part of tackling the productivity challenge in many advanced economies. the second relates to how efficiently resources are used, and includes such things as innovation and organisational improvements. this is total factor productivity. it is in this area that the euro area performance has been particularly weak. there are many reasons put forward for this weakness, but in essence they relate to the role of innovation, technology adoption and efficient reallocation of resources. some argue that innovations now are on a smaller scale than in previous decades and centuries. 2 the argument goes that the 19th century witnessed the diffusion of transformative inventions such as the railway and electricity ; whereas nowadays our innovations are things such as an app to order a taxi, rather than phoning. to an extent this may be true, but the facts seem to say otherwise. if falling total factor productivity growth were caused by slowing progress at the technological frontier, you would expect productivity growth of firms at that frontier to be correspondingly poor. the opposite appears true. from 2003