The USD Reserve Exodus Continues - Australia Diversifies Reserves Into China

Tyler Durden's picture

As we have discussed numerous times over the past year, there is a quiet movement among the world's central banks to diversify their reserves away from the pejorative USD. Whether it is direct trade linkages, hording physical precious metals, or simply buying foreign sovereign debt, there is a trend emerging. The latest defection, as BusinessWeek reports, is Australia's plan to invest about 5% of foreign currency reserves in China. The decision "represents the first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan," the country's deputy governor noted, adding that this step was an "important milestone" to "stronger financial linkages" leaving Australia "better positioned to benefit from the shift in global economic growth towards Asia." Of course, palling up to its closest trade partner is a big driver, but in a somewhat barbed comment on the strength of the AUD, Lowe noted, "quantitative easing that has taken place in a number of countries is having a significant effect on exchange rates of freely floating currencies... which is clearly making for difficult conditions in certain parts of the Australian economy."

 

Via Bloomberg BusinessWeek,

Australia’s central bank plans to invest about 5 percent of its foreign currency reserves in China as it deepens ties with the world’s second-largest economy, Deputy Governor Philip Lowe said.

 

The decision “represents the first time that the RBA will have invested directly in a sovereign bond market of an Asian country other than Japan,” Lowe said in a speech today in Shanghai. “It reflects the broader economic relationship between China and Australia and our increasing financial ties.”

 

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“By opening their capital markets to central banks like Australia’s, China is taking a step in liberalization for foreign investors,” said Martin Whetton, "... The bigger question will be if this is followed by investments from other central banks.”

 

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The move is “another important milestone in deepening our financial and economic linkages with China,” Australia’s Treasurer Wayne Swan said in an emailed statement. “Strong financial linkages between our economies will ensure that Australia is even better positioned to benefit from the shift in global economic growth towards Asia.”

 

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The move reflects “greater diversity of our investments”

 

The Australian dollar became the third major currency to directly trade with the yuan on April 10, after the greenback and Japan’s yen.

 

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Chinese investment in Australia has risen more than five- fold since 2006 and reached about A$20 billion at the end of 2011

 

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“One current example of this is related to the very high value of the Australian dollar, which is clearly making for difficult conditions in certain parts of the Australian economy,” he said. “The quantitative easing that has taken place in a number of countries is having a significant effect on exchange rates of freely floating currencies