* China's equity market could be world's largest - study
* China bond market could equal euro zone's
* Australia's funds, banking industry would benefit
(Adds study by Australian researchers)
By Wayne Cole
SYDNEY, March 26 China realising its ambitions
to internationalise the yuan is likely to be a "seismic event"
for global markets, leading to large capital flows and perhaps a
new reserve currency, a top Australian central banker said on
Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe
said the process had some way to go yet but that Beijing had
signalled its seriousness by last week widening the trading band
for the yuan, also known as the renminbi (RMB).
"The internationalisation of the RMB - and China's
associated move towards a liberalised capital account and more
flexible exchange-rate regime - has the potential to create a
seismic shift in the international monetary and financial
landscape," Lowe said in a speech to the Centre for
International Finance and Regulation (CIFR) conference in
"History teaches us that financial deregulation is an
inherently risky process, but that there are substantial payoffs
if it is done well," he added.
An eventual freeing up of the capital account would likely
lead to significant flows of Chinese funds offshore and greater
demand for products with which to hedge foreign currency risk,
A new report from the Australian government-sponsored CIFR
said China's 10-year timeline for substantial liberalisation of
its financial system could be accelerated if the current
Shanghai Free Trade Zone "experiment" is successful.
"Once capital controls have been removed and interest rates
and the exchange rate are market determined, the structure of
the RMB market - and indeed of global capital markets - will
look quite different," said the report's authors, Kathleen
Walsh, Geoff Weir and Barry Eichengreen.
The renminbi would become one of the most widely traded
global currencies, and mainland China's equity market could be
the largest in the world, with a capitalisation of around $30
trillion, the report said. China's bond market could be the
global No.2 behind the United States and equal to the entire
"The RMB is likely to be a significant part of central bank
foreign exchange reserves and RMB government securities may well
become the main alternative "safe asset" to U.S. Treasuries,
with important implications for global capital flows and
financial stability," it added.
Deregulation would not be without risks, particularly as
China's financial sector was already very large relative to its
But Australia's experience with floating its currency showed
there were substantial benefits, including greater control of
monetary policy, RBA's Lowe added.
China is already Australia's biggest single trading partner,
taking over a third of its exports - mostly commodities such as
iron ore and coal.
A freeing up of China's financial system could also be a
boon for Australian banks and fund managers, opening up
increased investment opportunities within China and helping to
manage Chinese flows into Australia.
"In Australia's case, our very close trading ties with
China, our funds management expertise, our natural endowments in
sectors of strategic importance to China and our ongoing need
for overseas capital to help fund investment all suggest
considerable scope for building much closer and mutually
beneficial financial ties between the two countries," Walsh
(Additional reporting by Lincoln Feast; Editing by Jan Paschal
and Eric Meijer)