RBA to invest foreign currency reserves in China

Australia’s central bank plans to invest about 5 percent of its foreign currency reserves in China as it deepens ties with the world’s second-largest economy, Deputy Governor Philip Lowe said.

The decision “represents the first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan,” Lowe said in a speech Wednesday in Shanghai. “It reflects the broader economic relationship between China and Australia and our increasing financial ties.”

The announcement bolsters China’s efforts to raise the international profile of its currency without ending controls on capital movements. The move follows Australian Prime Minister Julia Gillard’s unveiling of direct trading between the yuan and the Aussie on a visit to China two weeks ago, tightening ties with her nation’s top trading partner. 

“By opening their capital markets to central banks like Australia’s, China is taking a step in liberalization for foreign investors,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “Given the strong economic ties between the two nations, Australia was an obvious candidate to be allowed to make this investment. The bigger question will be if this is followed by investments from other central banks.”

The Reserve Bank of Australia will join central banks from Thailand, South Korea and Hong Kong in seeking a quota to buy Chinese assets. The RBA held foreign currency assets of A$38.25 billion ($39.2 billion) as of March, according to its website.

The move is “another important milestone in deepening our financial and economic linkages with China,” Australia’s Treasurer Wayne Swan said in an emailed statement. “Strong financial linkages between our economies will ensure that Australia is even better positioned to benefit from the shift in global economic growth towards Asia.”

Australia’s economy has been boosted by a resource investment boom to meet commodity demand from developing nations including China, its largest trading partner.

The move reflects “greater diversity of our investments” and will help the RBA’s understanding of Chinese markets, Lowe said Wednesday. China’s central bank has approved an initial investment quota, he said. The Australian dollar became the third major currency to directly trade with the yuan on April 10, after the greenback and Japan’s yen. (Bloomberg)