The Interim Report is a clarion call for Australia’s financial services industry on Australia’s international integration in the region. The FSI wants to know about major impediments, policy formation and public and private sector coordination in order to work out how Australia can better integrate its financial system with the rest of Asia.
There are two interrelated parts to this: the internationalisation of the RMB and establishing Australia and Sydney as a financial and RMB hub for Asia.
The question facing the FSI and our financial services industry is: do we want to be a progressive passenger or an active leader in the RMB revolution?
The blue-sky opportunities offered by the internationalisation of the RMB and the liberalisation of China’s capital account are not questioned. However in the short-to-medium term, the establishment of the necessary infrastructure to facilitate trade and invoicing in RMB as well as investment in RMB denominated products (including bonds, equities, funds and derivatives) is an expensive exercise. Also, it involves taking a view on new risks, at a time when many financial markets participants, and importantly their regulators, are risk-averse.
Australia has taken steady and important steps in the right direction, namely by establishing a bilateral local currency swap agreement between the Reserve Bank of Australia and the People’s Bank of China, by holding foreign currency reserves in RMB and by the development of a local RMB settlement system by the ASX and the Bank of China. Further, it is hoped that in the not-too-distant future, Chinese authorities will appoint an official clearing bank in Australia as well.
That said, the success of integration into the region hinges on two developments: a greater understanding of RMB related products and processes by the participants in Australia’s financial system; and greater collaboration (a) intra-Government (at all levels), and (b) between the public and private sectors.
There are two paths at this fork in the road.
Path 1 – All good things come to those who wait
Going down this path involves maintaining the current development trajectory. It does not deny the growth in importance of China or its currency, in fact it acknowledges that importance. However, progress is directed to steadily working towards removing identified barriers to the increasing relevance of the internationalisation of RMB to Australian financial services, rather than making investments to influence that relevance. This path has the advantage of not requiring as much effort or leadership – allowing the focus to be applied to other aspects of business. It allows time for potential risks related to China to “play out” before a significant commitment is made. It also relaxes the pressure on financial market business who are suffering from “change fatigue”.
Path 2 – Knowing the way, going the way, showing the way
This path involves a much higher level of engagement in the journey from our financial services industry, and from our government. It lifts the current trajectory, working to increase awareness of, and preparation for, the “seismic” event of the deregulation of China’s capital account and liberalisation of its currency. We have already seen an exponential increase in regulations which relax restrictions on cross boarder capital flows. The latest developments include the Shanghai Free Trade Zone, intra-group cross border loans, PRC credit support to back off-shore funding and the expansion of the QDII and QFII investment regimes. On this path the Australian industry establishes a clear understanding of the transformational impact which RMB internationalisation and convertibility could have to Australian financial services, commits to taking advantage of the opportunities which it presents and works to lead the global marketplace by seizing those benefits for growth of business in, and regional relevance of, Australia. It involves greater investment, greater risk and greater return. On this path, our financial services industry must work out what it needs from our government and clearly ask for it. Our government then needs to do what it can to help. This goes much further than removing identified impediments to use of RMB in Australia, it involves an active identification of specific opportunities and setting plans to achieve their realisation. Examples of this are:
- Asking the Australian government to take active involvement in the establishment of the linkage from an RMB clearing bank (hopefully to be appointed soon) in Australia to China. This is not only a Chinese legal and government matter, it is an Australian legal and governmental matter too. Efforts here will improve clarity on when settlements involve commercial bank money and when they involve central bank money – this is important to facilitating transfers of large sums of RMB.
- Asking the Australian government to encourage, or even participate in, the creation of significant RMB denominated investments in Australia – such as the issuance in Australia of RMB denominated bonds by Australian issuers (including governments), once the financial market infrastructure is in place to permit this to occur (a major step towards establishing this infrastructure has occurred today – our alert on this is available here). The availability of a range of RMB investment products in Australia will also encourage RMB trade settlement. At the moment there is at least a perceived lack of RMB denominated yield opportunities in Australia. Instruments offered by Australians in Australia denominated in RMB allow “investment in China”, without having to taking exposure to the regulatory and disclosure regimes of China (or particular Chinese issuers).
- Asking the Australian government to treat financial services like other critical Australian exports to China by working with the Chinese authorities to expeditiously break down the cross-border regulatory roadblocks which prevent RMB denominated financial products manufactured in Australia from being offered to a Chinese investor base. Opening a window to China for Australia’s region-leading funds management industry could develop into an enormous new export market for Australia.
A key element of this approach is to increase awareness, understanding and commitment of the RMB internationalisation opportunity. Industry would need to show the way to government, and our government would need to support and encourage it however they can. This path’s destination may be close to establishing Australia and Sydney as a financial services hub, rather than a spoke on an RMB centred wheel.