hedge their currency and other risks on their new offshore investments. this growing demand can be expected to support the development of foreign exchange markets in china. the ability to hedge foreign exchange risk is – alongside the ability to denominate foreign liabilities in local currency – an important ingredient in helping ensure that the benefits associated with a more open capital account and flexible exchange rate are not outweighed by potential financial ( in ) stability costs. indeed, the development of deep and liquid hedging markets is one of the reasons why australia ’ s experience with capital account liberalisation and exchange rate flexibility has worked out well. when we first moved from a fixed, to a managed, to a floating exchange rate regime in the 1970s and 1980s, these markets were not particularly well developed, but they have since matured significantly. in large part, this occurred organically in response to the increase in demand for hedging products that arose once the exchange rate became more variable. this may well be the case for china too. this positive feedback loop between liberalisation and market development is also an important lesson from our own experience : if liberalisation does not occur it is hard for markets to develop, and if markets are not developed it is hard to liberalise. but a gradual process of liberalisation can promote market development and stability which makes it easier to liberalise further. one element of this positive feedback loop is that greater use of rmb for trade invoicing by chinese firms can allow these firms to reduce currency mismatches on their balance sheets and thus alleviate potential vulnerabilities that could otherwise arise from a more flexible exchange rate regime. another is that, as capital account liberalisation proceeds, the entry of non - residents to china ’ s domestic financial markets will increase the depth of these markets. and as non - residents become more willing to take on rmb exposures, the pool of potential counterparties for chinese entities seeking to hedge their foreign currency liabilities will also increase. centre for international finance and regulation ( 2014 ), “ internationalisation of the renminbi : pathways, implications and opportunities ”, research report, march. available at < http : / / www. cifr. edu. au / site / research / targeted _ research _ rmb _ internationalisation. aspx >. bis central bankers ’ speeches nobody knows precisely how this whole process of rmb internalisation will play out. this is partly because there is no historical precedent for an economy of china ’ s

hope. right now the big forces include : • for australia, the closing chapters of a very large and long - running terms of trade event, with all that means in terms of economic adjustment. this coincides with a household sector no longer being in a position to play a major role in leading growth by significantly increasing its leverage, because it had already done that in the past ; • a global economy growing but only moderately, affected by considerable structural change and facing legacy effects of debt, arising from a previous period of overconfidence and under - appreciation of risk ; • a disinflationary or deflationary environment for the production of goods and commodities, and even some services, accompanied by unusually low rates of wages growth ; • extremely low returns on safe financial assets, as central bank actions have removed a significant proportion of these assets from the market, and have encouraged investors to accept interest rate risk on the remainder by providing “ guidance ”, leading to : • high and rising valuations on existing fixed assets, including dwellings, around the world, but not so much, thus far, in the way of new capital formation by most existing businesses in the “ real ” economy. to this list of “ conventional ” forces we might add : • the “ disruption ” of the increasing application of digital technology, which may mean, among other things, that growth in sales, capital formation and returns to capital are happening in entities and activities we don't measure very well – or at all. many of these sorts of forces are low - frequency in their nature. most of the ups and downs in the time series from month to month, or even year to year, on which we all expend so much energy are just temporary fluctuations around these longer - run trends. if numerical forecasts can't be very dependable, are we – the economics community – much good at predicting these long - run forces? if we look back a decade, to the sorts of things that occupied much attention, the evidence is mixed. by the middle of last decade, we had certainly noticed the change in household borrowing and spending behaviour, understood that it was important and wondered how long it could continue, and what might cause it to alter course again. in that respect, we were at least looking in one of the right places. people had also sensed that the emergence of china was starting to have important implications for australia and the global economy. that said, the strength and duration of the bis central bankers