China leverage a brake on RMB internationalisation

Bernard Kellerman

The march towards internationalisation of the renminbi may be put on hold while China repairs its domestic economy, an expert panel has suggested.

In introducing a discussion on "Unlocking the Potential of the RMB", hosted by Thomson Reuters, moderator Naomi Fink, CEO of Europacifica Consulting, noted that China has accounted for 12 per cent of world GDP, 12 per cent of world trade, and was the world's largest oil importer as of 2014.

"This is really put the spotlight on the importance of the RMB as a trading currency particularly as China is now Australia's largest trading partner," she said.

Keynote speaker, Amy Auster, deputy director of the Australia Centre for Financial Studies, noted that while China has a very large domestic financial services sector, it is not accessible to international markets.

"Using the OECD trade restrictiveness index, we can conclude that China's financial services sector is not as open as most of the large are Asian economies - certainly Australia, Japan, South Korea, Malaysia, Indonesia even Thailand," she said.

"So, while China has huge growth potential it remains to be seen what path it will take in terms of opening up its financial services sector."

Huw McKay, deputy global head of economics at Westpac outlined the risk associated with China's path towards financial openness.

McKay suggested that China could be "a candidate" for a crisis caused by "an overleveraged corporate sector that overinvests, then realises the need to cut back, and generates a V shaped recession in economic activity", but not at risk of an overleveraged household sector.

"So the way to think about this is a recession could bring about a financial crisis in China, but it is highly unlikely that a financial crisis will bring about a recession," he said.

He added that while China has too much debt it has "just about is the right amount" of liabilities overall. However, he suggested that China needs to move to change its mix of debt.

"Getting the equity market moving is the best way to encourage the restructuring of China's liability stock, and to get a better balance between the equity side of the equation and the debt side of the equation," he said.

"Once that is done, the Chinese authorities will have more comfort that 'equity-like' projects are funded with 'equity-like' liabilities, rather than good old-fashioned vanilla debt, which is very difficult to service when it doesn't generate income from day one," McKay said.

"They will then be able to push forward more aggressively with the international financial liberalisation, particularly on the portfolio side."