Loosening yuan restrictions will open Australia to Chinese investors

For the past few weeks, the world's media seems to have been dominated by two unfolding dramas: the extraordinary and rather amateur performance in Washington, as the US government lurched towards potential default, and the concerning spike in Euro-region yields, against the backdrop of their apparently insoluble sovereign debt issues.

However, as Amy Auster reported in Saturday's Financial Review, there was also a really positive development last week (certainly for Australia), which seems to have simply "snuck under the radar".

You see, China has just decided to permit participating banks in Hong Kong (including foreign banks) to deal in Chinese yuan anywhere in the world when settling transactions.

How will that benefit Australia?

Let's take a look for a moment at the level of global sovereign indebtedness, as a percentage of GDP. The first piece of good news is that Australia sits at the bottom of the table, whereas Germany and the UK have more than three times the government debt levels of Australia. The US has more than four times Australia’s debt level, and Japan has a massive 9.5 times Australia’s government debt.

The second piece of good news is that China doesn't even appear on this list. And that's because it is a net lender to the rest of the world — mainly to the US.

When asked recently about the extent of China's continued growth prospects, Michael Spence (Nobel Prize-winning economist) said: "I think the answer is something like two decades, in the later part of that they will start to slow down."

A recent study (published by China's National Economics Research Institute) estimates that the country's total disposable income is some 65% higher than the government's official figures. And about 80% of this "hidden" income is in the hands of 20% of the population.

But more importantly, these wealthy households are saving something in the order of $1.5 trillion each year. And that represents roughly 50% more than the entire Australian economy.

China's stated aim is to surpass America's economic dominance. And by now internationalising its currency, this is clearly the next step towards that goal.

So, what does this mean for Australia?

Up until this recent announcement, the yuan could only be traded onshore for items like iron ore — and not property or shares. But following the announcement, the yuan can now be openly converted offshore — with only a few restrictions, for the time being.

However, as the new-found currency freedom grows, investors will be able to take funds in and out of China with little or no restriction.

Normally these investors would consider the US or European markets first up. But with their high levels of sovereign debt and the credit agencies looking to downgrade their strong ratings, Chinese investors will gravitate towards AAA safe-havens like Australia.

And as you can appreciate, gaining the benefit of just a fraction of this annual $1.5 trillion in savings, would have a dramatic (and positive) impact upon the Australian economy.

Bottom Line: Initially, those funds might target our share market. But this surge will quickly spread into commercial property, farms and major infrastructure projects.

All of which will serve to balance out Australia's economy and lessen our dependence upon the mining sector.

However, the Foreign Investment Review Board will urgently need to simplify its approval process because Australia requires an injection of investment funds like this to ensure its overall growth prospects.