The internationalisation of the Chinese renminbi (RMB) currency, in the same way that US dollar and the euro are freely convertible, is “likely to be” one of the “biggest forces” to shape the international financial system over the next 10 years or so, the Reserve Bank of Australia (RBA) governor Philip Lowe has said.
A “deepening” financial relationship between the two countries has led to an “increasing number of investment channels” that Australian entities can use to invest in Chinese financial markets, and vice versa, he continued.
CT Johnson, managing director at China research company, Cross Border Management, said that while the internationalisation of the RMB “hasn’t had a huge impact” yet, Australian mum and dad investors should be keeping an eye on shifts so that when the time comes, they can easily take advantage.
He said more opportunities to invest in Chinese companies, bonds and currency will arise 10 years into the future.
“I think it’s a very significant change for Australia from the stand point that if you go back a hundred years, it was really trade with England that was fairly dominant and then if you go back 50 years it was probably more of the Western Europe and certainly Japan was pretty big, but today it’s China that dominates our exports and dominates our imports,” Mr Johnson said.
“That movement is a significant change from the cultural beginnings of the country, to be tied so closely economically to an Asian country as opposed to a European one or an Anglo Saxon one,” he continued.
He predicted that with a freely convertible RMB, the Australian economy will “decouple” from the US and Western European economies, noting that an Australian economy coupled “more tightly” with Asia will be “the real change” seen.
“It will put a bit of distance between us and North America and Western Europe, but it should be good for Australia because Asia is a much more dynamic region financially speaking.”
In addition to being one of the countries most heavily affected by the ramifications of an internationalised Chinese currency, Mr Johnson said Australia will also be one of the first to feel the effects.
Australia, he explained, will have a “first mover” advantage, while the smaller size of the Aussie economy will assist it to perform more dynamically.
However, Australian investors may face the disadvantage of not having other countries to look to for lessons.
“Another danger that could occur is that China is not a very open country in terms of what’s happening within its government,” he continued, noting that when there are “problems” with the US dollar or euro, there is transparency around what is driving changes or issues.
“But the picture is much murkier when you start looking at China, so if China doesn’t match its own liberalisation with greater transparency and openness, that has the potential to create a blind spot or a trouble spot for all investors, whether they’re in Australia or anywhere else,” he continued.
Mr Johnson concluded by warning that as the internationalisation of the RMB proceeds, “there is a danger” that a bubble will occur. “I suspect that as the liberalisation proceeds, it will become a hotspot … that lots of investors will get in to, not because they have any particular economic rationale for doing it but because it’s something that’s new and exciting and interesting.”