Freeing up restriction on trade in China’s currency will be difficult but the benefits will be substantial, a Reserve Bank of Australia official says.
China’s currency, the renminbi, also known as the yuan, is not a fully floated currency like the Australian dollar.
The renminbi is allowed to trade in a tight trading range set by the People’s Bank of China (PBOC) and only last week widened that range to two per cent from one per cent.
RBA deputy governor Dr Philip Lowe says China’s transition to a more flexible exchange rate will be gradual but it also has the “potential to create a seismic shift in the international monetary and financial landscape”.
“I suspect that over the years ahead, the further liberalisation of the Chinese capital account could turn out to be one of the really significant events in global capital markets,” Lowe said.
“While China clearly has an interest in getting this process right, the rest of the world, including Australia also has a strong interest in the outcome.
“History teaches us that financial deregulation is an inherently risky process, but that there are substantial payoffs if it is done well.”
Lowe said it was important that China liberalises trade in the renminbi despite the difficulties.
“If liberalisation does not occur, it is hard for markets to develop, and if markets are not developed it is hard to liberalise,” he told a Centre for International Finance and Regulation (CIFR) conference in Sydney on Wednesday.
“But a gradual process of liberalisation can promote market development and stability which makes it easier to liberalise further.”
Lowe said China needed to be careful in its reform path but could learn from Australia’s own experience when it floated the Australian dollar 30 years ago.
“If Australia’s experience is any guide, the journey can turn out to be a positive one,” he said.
“For us, financial reform and the integration of our capital markets into the global system delivered the basis for sounder macro-economic policy, more diversified portfolios for Australian investors and the development of tools for hedging risks.
“But the journey was not without its troubles and there was much learning by doing along the way.
“At the beginning, the risk management skills of the Australian banks were inadequate to cope with a world in which there was much freer access to foreign capital and credit was no longer rationed.”
