Also, the central bank has invested some of its foreign currency reserves in RMB, which Lowe says has “allowed us to deepen our own understanding of developments in Chinese financial markets and the RMB. Currently, around 3% of our net foreign reserves are invested in RMB”. A third element is a bilateral local currency swap agreement between the RBA and the People’s Bank of China (PBC). The swap was signed in 2012 and allows the two central banks to exchange their local currencies for mutually agreed purposes.
The key benefit of the swap 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. ” 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,” he adds. Also, he notes, the RBA is currently working with the PBC on future RMB clearing and settlement arrangements, in particular the establishment of an official RMB clearing bank in Australia. In keeping with the process that has recently been followed in a number of other jurisdictions – including London, Frankfurt, Paris, Luxembourg and Seoul.
“This would involve the signing of a Memorandum of Understanding between the RBA and the PBC, and the designation of an official clearing bank in Australia. 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,” says Lowe.
In essence, official RMB clearing banks are afforded more direct access to China’s onshore RMB and foreign exchange markets than other offshore institutions, he explains. 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.
“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. And, 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,” he notes.
Finally, Lowe says that the central bank is looking to to obtain a quota for Australian-based financial institutions to invest in mainland China under the Renminbi Qualified Foreign Institutional Investors (or RQFII) scheme. 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.
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,” he says.