RBA assistant governor (financial markets) Guy Debelle just gave an interesting speech on Asian financial integration.
As expected he lauded growing ties throughout the region, but asked “whether there is such a thing as an optimal degree of financial integration? Can there be too much of it?”
His answer was an unqualified yes. Debelle said that “the experience of the financial crisis shows that at least some forms of financial integration didn’t go too well.”
But his most important point was the one he made about the path of Chinese financial deregulation and capital account liberalisation.
Debelle said that:
Almost no other country has managed this process without encountering significant problems. While China has endeavoured to learn the lessons from all the other countries that have gone down this path, including Australia, it will be a significant achievement if they are able to pull it off without encountering some problems.
That’s not to say he didn’t laud initiatives like the Shanghai-Hong Kong Stock Connect scheme and the “soon-to-be-announced” Shenzhen-Hong Kong Stock Connect.
Nor does it detract from the fact that “from an Australian perspective, these avenues should provide an opportunity for Australian banks, asset managers and their clients to increase their exposure to the Chinese domestic financial market.”
With Australian international investment in Asian bonds and stocks below 10% of portfolio allocation, Debelle said “there would appear to be significant scope for further financial integration with the region.”
But his warning on China at a time when its economy is clearly slowing, when Shanghai stocks have risen $6.7 trillion in value over the past year and when the chances of a hiccup in Asian corporate bond marekts remain a clear and present danger, might give investors pause for thought.