The Reserve Bank has underlined its confidence in the Chinese yuan's future role as a reserve currency for the Asian region, saying it will invest $1.6 billion in Chinese government debt.
As part of a push to deepen financial ties with Australia's biggest trading partner, the central bank will put 5 per cent of its $32.4 billion in net foreign exchange reserves into Chinese sovereign bonds, it said on Wednesday.
After China this month allowed direct trade between the Australian dollar and the yuan, or renminbi (RMB), the move is another attempt to spur on the gradual opening up of China's financial system.
Reserve deputy governor Philip Lowe said the investment reflected the deepening relationship between the two nations, and it would improve the central bank's understanding of our biggest trade partner. "It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets," Dr Lowe said in Shanghai.
"Over the long run, and particularly as capital account liberalisation occurs in China, the RMB is likely to become one of the major reserve currencies of the region."
Dr Lowe said the investment was part of a broadening in Australia's ties with China from trade to finance. The trend has also seen Australian banks' claims on China increase more than four-fold since 2008, to in excess of $16 billion.
But while the RBA expects the yuan to become a reserve currency in the long term, it is not widely held by central banks today.
The greenback still accounts for about 55 per cent of the $US10.9 trillion in the world's official currency reserves, the International Monetary Fund says, and central bank holdings of the Australian dollar are likely to be more extensive than holdings of the yuan.
The chief currency strategist at Westpac, Robert Rennie, said attempts to encourage globalisation of the yuan were positive for the world financial system, but stressed it would take a long time for changes to occur.
He noted the RBA's moves to encourage sovereign bond markets to develop across Asia, through measures such as removing barriers to companies trading in the yuan. "These are all important developments in the globalisation of the RMB. But that's a story that still has some way to go," Mr Rennie said.
The Reserve also signed a $30 billion swap agreement with the People's Bank of China last year, which it said would boost the availability of yuan in Australia, especially at times when markets were stressed.
The government has made greater integration with Asian financial markets a key policy goal, through the white paper on the Asian Century by former Treasury secretary Ken Henry.
Treasurer Wayne Swan said the latest deal was a milestone in realising these ambitions, which Prime Minister Julia Gillard also pursued in a recent round of meetings with Chinese leaders. "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," Mr Swan said.
Financial links between Australia and China have been boosted by a sharp increase in two-way investment flows in recent years, with much of the Chinese investment going into the resources sector.
In the longer term, Dr Lowe said both nations could benefit from further Chinese investment in Australian projects, while China offered a chance for the $1.5 trillion pool of superannuation to diversify.