i j macfarlane : overview of the australian economy opening statement by mr i j macfarlane, governor of the reserve bank of australia, to house of representatives standing committee on economics, finance and public administration, brisbane, 8 december 2003. * * * mr chairman, it is a pleasure to be here today in front of your committee again, and i am very pleased that we have been able to meet in brisbane for the first time. as you know, we take these hearings very seriously because they enable parliament, through its representatives on the committee, to question the reserve bank in depth and in public. as usual i will make some introductory remarks in which i will focus on three subjects : • how the situation has changed since the statement i gave to this committee in june ; • how our forecasts have evolved ; • the background to our monetary policy actions. 1. june and now calendar year 2003 was an unusual one for the world economy. in the first half, prospects for world growth looked doubtful, with the most extreme uncertainty being concentrated in mid - year. if you remember, this is when talk of possible deflation in the united states reached its peak, and the us authorities gave the impression that they needed lower interest rates and a lower us dollar to help them through. in europe, economic activity was weakening, and asia received a temporary knock - back from the severe acute respiratory syndrome ( sars ) outbreak. at that time, virtually all the central banks of note - the federal reserve bank of new york ( the fed ), the bank of england, the european central bank ( ecb ), the bank of canada, etc. - reduced interest rates, and i indicated to this committee that if things did not improve, we might also have to do so. in the event, we did not because we witnessed one of the sharpest turnarounds in economic prospects any of us has seen. while in the june quarter most major countries, including many in asia, saw declines in gross domestic product ( gdp ), by the september quarter they were all growing strongly. the weakness we had seen in the june quarter turned out to be a ‘ false signal ’. in financial markets, bond yields rose sharply, share prices continued to rise, and various prices connected with international trade, such as commodity prices and transport prices, also rose. talk of deflation ceased and the short - lived bout of monetary easing stopped. business and consumer confidence indicators around the world rose back to levels consistent with reasonable economic

been the largest recipient of odi flows from the mainland. at present, about 60 % of odi from the mainland has gone to hong kong or via hong kong to other places. the significant share of hong kong in mainland ’ s fdi and odi underscores the unique role of hong kong as a gateway for foreign enterprises to access the mainland market, while at the same time being a springboard for mainland institutions to gain exposure to international markets. with respect to portfolio investment flows, market attention has been focusing on portfolio flows from advanced economies towards mainland china. in my view, portfolio flows in the opposite direction – i. e. portfolio outflows from mainland china – will also present huge bis central bankers ’ speeches opportunities to the asset management industry, especially given the fact that the mainland economy is the single largest provider of savings in the world. currently, outward portfolio investment ( opi ) from the mainland is only around 5 % of its gdp, still far below 57 % for east asia, 42 % for the us and over 100 % for the uk. our inhouse research findings show that an economy ’ s portfolio investment outflows as a percentage of gdp tend to grow along with the level of economic development measured by per capita gdp. so, given the huge potential outward portfolio investments from mainland china, how will they be allocated across different financial markets? our researchers have studied this particular subject in depth and found that the home bias is still very much there, i. e. the closer the potential investment destination to mainland china, the more opis it will receive from mainland china. as such, hong kong is likely to be one of the key destinations of mainland ’ s opis and the amount of those opis hong kong will receive will increase as china ’ s gdp grows. apart from being the final destination for these investments, hong kong can also act as an ideal launch platform for these investment flows to reach other major global markets. since the introduction of the qdii scheme, about us $ 67 billion worth of investment quotas have been granted up to september 2010. it is likely that a significant portion of these moneys is managed out of hong kong. in fact, over 40 mainland companies providing fund management, securities and futures, insurance, and other services have already established a presence in hong kong to manage the funds flowing out of the mainland and engage in fund advisory businesses. we expect the process of financial liberalisation in mainland china to be a gradual and controllable one,