Australia’s Central Bank Invests in Chinese Government Debt

Australia’s central bank, the Reserve Bank of Australia (RBA), plans to invest around 5% of its foreign currency reserves in Chinese government bonds, according to its deputy governor.

The RBA has foreign currency reserves of A$38.2bn and this will mark its first investment in the sovereign bonds of an Asian country other than Japan.

“This decision to invest in China is an important one,” said Philip Lowe, deputy governor of the RBA in a speech to the Australian Chamber of Commerce in Shanghai. “It reflects the broader economic relationship between China and Australia and our increasing financial ties.

“It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets.”

Earlier this month Australia became the third country after the US and Japan to establish a direct currency trading link with China. In March 2012, Japan became the first major developed country to receive approval to invest directly in Chinese sovereign debt. The RBA and the People’s Bank of China (PBOC) also set up a currency swap facility in the same month.

China has been gradually opening up its tightly-controlled financial and capital markets in an effort to accelerate economic growth. Last year, it raised the investment quota for Qualified Foreign Institutional Investors (QFIIs) twice to provide greater access to its markets while relaxing its grip on its currency as part of its attempts to internationalise the renminbi (RMB).

Lowe expressed optimism that once some other existing constraints were overcome, the RMB would “become the invoicing currency of choice for many businesses on both sides of our trading relationship”.

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