Australia to invest foreign currency assets of A$1.9b in Chinese bonds

Central bank will invest A$1.9b, or 5pc of its foreign currency assets, in sovereign securities as bilateral economic ties increase

PUBLISHED : Thursday, 25 April, 2013, 12:00am
UPDATED : Thursday, 25 April, 2013, 5:37am

Australia's central bank plans to invest about 5 per cent of its foreign currency assets, or A$1.9 billion, in Chinese government bonds due to the growing economic and financial ties between both nations.

The People's Bank of China (PBOC) has approved an initial quota for the investment, the first time that the Reserve Bank of Australia (RBA) would have invested directly in a sovereign bond market of an Asian country other than Japan, Philip Lowe, the RBA's deputy governor, said yesterday at the Australian Chamber of Commerce in Shanghai.

He gave no details of the planned investment and officials at China's central bank could not immediately comment.

The RBA's foreign reserves stood at AS$38.2 billion (HK$304 billion) at the end of last month.

The bank's decision came two weeks after both countries agreed on direct trading between the onshore yuan and Australian dollar so as to facilitate trade and investments.

Lowe said the move would offer "greater diversification" for the RBA's investments. "Over the long run, and particularly as capital account liberalisation occurs in China, the RMB is likely to become one of the major reserve currencies of the region," he said.

Li Wei, a Standard Chartered Bank economist, said: "The Chinese authorities have been gradually easing capital account controls, in part through allowing foreign institutions to invest in the interbank bond market. The move will also help promote the yuan's global role."

Tan Yaling, head of the China Forex Investment Research Institute, said RBA's decision to add yuan assets into its portfolio would help it hedge against risks amid the global market turmoil.

China, whose appetite for commodities such as iron ore and gold has surged in recent years, is Australia's largest export destination. About 26 per cent of Australia's exports went to China and 15 per cent of its imports came from China, Lowe said.

Australia's data showed bilateral trade hit US$134.2 billion in the financial year of 2011 to 2012.

Beijing has pledged to deepen financial reforms by further liberalising interest rates, easing capital control and improving flexibility of the exchange rate regime.

PBOC deputy governor Yi Gang said in Washington this month that the yuan's trading band would be widened "in the near future".

Regulators also gave the green light last month for qualified foreign institutional investors to trade bonds in the interbank market under limited quotas.

Lowe also said both countries should learn more about their respective business, social and political environments.

China's financial system remained highly regulated while investment and hedging tools were still inadequate, he added.

"There is much work ahead if the depth of the financial relationship is one day to match the depth of the trading relationship," he said.