Australian central bank to invest in China bonds

In a bid to build closer economic ties with China, the Australian central bank plans investments of about 5 per cent of its foreign reserves in Chinese government bonds.

''This decision to invest in China is an important one. It reflects the broader economic relationship between China and Australia and our increasing financial ties'', Philip Lowe, deputy governor of the Reserve Bank of Australia (RBA), said in a speech on Wednesday in Shanghai. ''It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets.''

The move comes after Australia becoming only the third country to establish a direct currency trading link with China, after the US and Japan. In March 2012 the RBA and the People's Bank of China also set up a currency swap facility. The RBA held around A$38.2 billion in foreign reserves at the end of March.

China, Australia's top export destination, and its biggest source of imports, accounted for a quarter of Australia's exports - mainly commodities, up from less than 5 per cent during the 1990s, according to the RBA.

Australia would join a small but growing band of central banks that have looked to China for diversification of their foreign reserves.

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. ''It reflects the broader economic relationship between China and Australia and our increasing financial ties,'' he added.

According to analysts, the announcement would give a fillip to China's efforts to raise the international profile of its currency without ending controls on capital movements. Australian prime minister Julia Gillard had, during a visit to China two weeks ago, unveiled plans for direct trading between the yuan and the Australian dollar, tightening ties with her nation's top trading partner.

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.''

Responding to audience questions, Lowe said the RBA planned investments in onshore government securities and would do so by the end of the year.