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Australia central bank to buy China bonds

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(Globalpost/GlobalPost)

Australia's central bank announced plans Wednesday to invest Aus$2 billion of its reserves in Chinese government bonds, building on recent moves to begin direct trade of the two nations' currencies.

Reserve Bank of Australia (RBA) deputy governor Philip Lowe said the decision represented the "first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan".

"Our current intention is to hold around five percent of Australia's foreign currency assets in China," Lowe said of total reserves worth some Aus$38 billion.

"The People's Bank of China has approved an initial investment quota and we are currently working through the necessary agreements prior to the investment being made."

The move follows a recent agreement, settled during Australian Prime Minister Julia Gillard's official visit to China earlier this month, for the two nations to commence direct trading of their currencies, bypassing the United States dollar.

The Australian dollar is only the third currency in the world after the Japanese yen and greenback to have direct trade with the yuan, in a move aimed at streamlining trade and cutting costs.

China, the world's number two economy, is Australia's largest trading partner according to Canberra, spending billions on resources it needs to fuel its growth, while Australia is China's seventh largest partner.

Lowe said the RBA's decision to buy Chinese government bonds was an "important one", reflecting a broadening of the economic relationship between the key partners and allowing a diversification of the bank's assets.

"Over the long run, and particularly as capital account liberalisation occurs in China, the renminbi is likely to become one of the major reserve currencies of the region," the deputy governor said.

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http://www.globalpost.com/dispatch/news/afp/130424/australia-central-bank-buy-china-bonds