Out-Law News | 29 Jul 2014 | 12:15 pm | 3 min. read
Deputy governor Philip Lowe said the RBA is working with the People's Bank of China (PBC) on a memorandum of understanding that would designate an “official RMB clearing bank”.
Lowe told an ‘RMB internationalisation roundtable’ meeting in Sydney on 23 July: “The RBA is currently working with the PBC on future RMB clearing and settlement arrangements... It is important to note that the RBA would not expect to play a significant role in choosing which particular bank would be designated. This is, quite rightly, largely a matter for the Chinese authorities. In terms of timing, we are hopeful that an official RMB clearing bank could be designated over the coming months.”
The differences between an official RMB clearing bank and “the channels that are already available are quite subtle, though still important”, Lowe said. “In essence, official RMB clearing banks are afforded more direct access to China's onshore RMB and foreign exchange markets than other offshore institutions. More specifically, official clearing banks have direct access to China's interbank RMB payments system and receive a quota to transact in China's onshore foreign exchange market. These changes also entail more direct access to RMB liquidity from the PBC.”
Lowe said that while an official RMB clearing bank would not directly increase the range or type of RMB transactions that are permitted to take place between Chinese and Australian entities, it would improve the efficiency of cross-border RMB transactions, “for example by potentially reducing payment delays and/or reducing transaction costs”.
Over time, the presence of an official clearing bank “could encourage local financial institutions to offer a broader range of RMB products to the local market than is currently available”, Lowe said. “Indeed, the establishment of a clearing bank in Australia would help ensure that we are well positioned to participate in the next stages in the process of RMB internationalisation.”
However, Lowe said that if China ultimately follows “the general path travelled by a number of other countries, these clearing banks are likely to become less significant”. In other currencies, alternative arrangements exist for the clearing of cross-border flows, with financial institutions managing the liquidity and risk issues without access to an official clearing bank, Lowe said. “If this eventually turns out to be the case for the Chinese currency as well, then there is likely to be a reduced need for these official clearing banks. In the meantime, they are an important stepping stone on the path to a more internationally integrated Chinese currency.”
Another goal is to obtain a quota for Australian-based financial institutions to invest in mainland China under the RMB qualified foreign institutional investors scheme (RQFII), Lowe said. Following the granting of a RQFII quota to a specific jurisdiction, financial institutions operating within that jurisdiction can apply to the Chinese authorities to obtain an individual investment quota. Approved institutions can then invest their own quota in selected mainland Chinese bonds and equities using RMB obtained in the offshore market.
Lowe said: “In this way, the RQFII scheme can be thought of as representing both a partial relaxation of controls on inward portfolio investment to mainland China and as a means of developing the offshore RMB market. An RQFII quota would therefore represent an important next step in facilitating cross-border RMB-denominated investment transactions between our two economies. And, as Australia has a relatively large and sophisticated private funds management sector, there is significant potential for growth in this area.”
According to RBA, currently less than 1% of Australia's merchandise trade with China is invoiced in RMB. For China, around 12% of total merchandise trade in 2013 was invoiced in RMB, although RBA estimates the number to be around 3% to 5% if trade with Hong Kong were excluded. RBA said these figures “suggest that there remains significant potential for growth in RMB trade invoicing, not only by Australian firms, but by firms in other countries as well”.
Currently, RBA has around 3% of its net foreign reserves invested in RMB. In 2012, RBA and the PBC signed a bilateral local currency swap agreement, which allows both banks to exchange their local currencies for “mutually agreed purposes”. RBA said the “key benefit” of the agreement is to “provide confidence to the Australian market that RMB liquidity will be available through a ‘backstop’ channel in the event of some disruption to the market for RMB”.
RBA said: “The swap is not meant to provide a ‘cheap’ source of RMB funding to the Australian market in normal times. Its existence, though, should be helpful for market development, as it provides market participants with greater confidence that RMB will be available in Australia during times of dislocation. Since the swap agreement was signed there has not been a need to activate it, although it could be used should it be required.”
Australian statistics show that two-way trade between China and Australia in 2013 was worth more than 141 billion Australian dollars (AUD) ($132bn), an increase of 20.7% year on year. Figures also show that one out of every three dollars of Australian export goes to China. Fifty-four of every 100 tonnes of China’s imported iron ore comes from Australia, while China’s total direct non-financial investment in Australia by the end of 2013 was AUD 17bn ($16bn).