Australia could miss out on a huge slice of pie if current legislation isn’t amended to allow financial services to piggy back on the enormous predicted growth of the Chinese financial landscape.
This is according to Geoff Weir, a research fellow from the Centre for International Finance and Regulation (CIFR).
Along with colleague Kathleen Walsh, and Barry Eichengreen from the University of California Berkley, Weir authored a comprehensive academic research report into the internationalisation of the renminbi (RMB) and its implications for global financial markets.
He said the most surprising result was just how close the RMB is to becoming a major global reserve currency.
“Based on conservative assumptions its equity market is likely to be the biggest in the world in 10 years. They’re really big numbers – it opens questions about what type of capital flows we’ll see,” he said. “There are enormous opportunities down the track for the Australian funds management industry to pick up a mandate [in China].”
But these opportunities could all be missed if some “serious” policy issues surrounding an investment manager regime (IMR) aren’t tackled first, Weir said.
“It’s critical that Australia gets an effective IMR in place. The sooner the better. There are already some companies picking up mandates in Australia but typically that’s through offshore vehicles.”
The report says Australia is in a better position than most to benefit from the Chinese developments due to the close trading ties between the two countries, Australia’s funds management expertise, and its natural endowments in sectors of strategic importance to China.
However, without the right “financial architecture” and policy settings, Australia will be on the back foot.
“There is still considerable market uncertainty regarding the tax treatment in Australia of offshore investors investing through Australian domiciled investment vehicles,” the report stated. “This needs to be addressed, by way of finalising legislation to put in place an effective investment manager regime.”
And it’s important: the report’s “conservative” assumption is the forecast market capitalisation of China will be around US$30 trillion within a decade - close to a quarter of that of the world’s - compared to a projected US$22 trillion (18%) for the US.
This would see the Chinese equity market become the largest on the planet in just a few short years.
The report also reveals that Chinese bond markets are likely to become the second biggest in the world, and the RMB is set to be a major trade invoicing and settlement currency with implications for trade financing, FX, and derivative markets.
“A lot of people look at [the numbers] and say ‘no way José’, but if you actually look at it, they’re very credible,” said Weir.
He said Australian advisers need to pay attention to this now and look to bank in on opportunities spurred by the market growth.
“I think what they should take away is that things are changing in China – and fast – in terms of liberalising capital controls and corporate government,” he said.
But to tap into such opportunities, Weir reiterated the importance of adapting Australian policy.
“We need to start doing it now, because these changes are happening very quickly.”