* 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 (Reuters) - 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 Wednesday.
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 Sydney.
"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, Lowe said.
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 euro zone.
"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 economy.
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 said. (Additional reporting by Lincoln Feast; Editing by Jan Paschal and Eric Meijer)