Geoff Weir

There is no doubt China wants the renminbi (RMB) to become a major global currency. While there is no public timeframe, one thing is clear: the ongoing move towards internationalisation of the RMB will have a huge influence on global volumes, currency denomination and location of financial flows and financial market activity over the coming decades.

China will within the next decade be both the world’s largest economy and the single most important driver of global trade.  The move towards internationalisation of the RMB will require ongoing relaxation of capital controls on China’s inward and outward investments, and full currency convertibility.

These factors will see a massive increase in investment and trade-related flows into and out of China, and in the associated provision of RMB denominated financial products and services in trade financing and investment.

There will be winners and losers. For instance, local and offshore investors have used Australian dollar and Australian dollar denominated assets as proxies for exposure to the Asian growth story. As the RMB becomes fully convertible and capital controls are gradually eased, these “proxy” trades will decline.

So how is Australia positioned to ensure it benefits from these enormous changes?

To date the process of building up RMB liquidity offshore has focused on encouraging RMB trade invoicing. While only a small proportion of Australia’s trade with China is currently invoiced in RMB, a recent Bank Customer Survey of Australian companies trading with China showed that it is likely to increase, potentially resulting in a build-up of RMB liquidity and RMB-denominated financial products and services in Australia.

Looking beyond trade invoicing, there are good reasons why Australia has the potential to become an important part of the offshore RMB network. For starters, Australia is ideally positioned, being the first major financial market to open after the US closes, before Singapore, Tokyo and Shanghai, and remaining open for much of the Chinese trading day.

Australia has a world class payments settlement system and a predictable, efficient and well-regarded legal framework and regulatory regime, with strong prudential oversight.

Australia already has critical mass and liquidity in funds management, and equities, derivatives and foreign exchange markets.  This is allied with a robust banking system and efficient distribution platforms, providing both liquidity and confidence.

While the extent to which in practice Australia develops as an offshore RMB hub is very much in the hands of the Chinese authorities, Australia has reasons for optimism. Firstly, in 2012 China and Australia entered into a bilateral currency swap agreement. The swap facility is the fourth largest after Hong Kong, Singapore and South Korea.  Last week it was announced the AUD has just become the third major currency outside of USD and JPY to have direct trading against CNY. And perhaps most importantly, the recently announced strategic partnership between China and Australia will provide an annual forum at which policy issues can be discussed.

So there are encouraging reasons for thinking that China may be willing to encourage and support Australia’s development as a location for the expansion of the network of offshore RMB hubs.

Nonetheless, more work needs to be done on understanding the key issues, drivers and impediments for developing RMB business in Australia. They will be the subject of a joint research project to be conducted by the Centre for International Finance and Regulation (CIFR) and the Shanghai University of Finance and Economics. This important project was announced last Friday by the Treasurer at the RMB Trade and Investment Dialogue in Sydney. It will incorporate a survey of both Chinese and Australian companies regarding constraints to RMB invoicing; the implications of RMB internationalisation for regional and global financial markets; and the market conditions and policy framework that may need to be in place to encourage development of an offshore RMB market in Australia.

Australia benefits enormously through its trade links with China. We now need to ensure that we have both the market conditions and the policy framework in place to also benefit from the massive changes that are just beginning in global financial markets as China eases its capital controls and moves towards a more market determined exchange rate.

Geoff Weir is a consultant for the Centre for International Finance and Regulation. A version of this article was previously published in The Australian Financial Review.