Australia's central bank to invest in Chinese bonds

China's President Xi Jinping shakes hands with Australia's Prime Minister Julia Gillard Australia and China have been trying to foster closer economic ties

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Australia's central bank is planning to invest around 5% of its foreign currency reserves in Chinese government bonds, its deputy governor has said.

It will be the first time the Reserve Bank of Australia (RBA) will invest in sovereign bonds of an Asian country other than Japan.

The RBA has foreign currency reserves of A$38.2bn ($39.2bn; £25.7bn).

Earlier this month, the Australian dollar became the third currency to trade directly with the Chinese yuan.

"This decision to invest in China is an important one," Philip Lowe, deputy governor of the RBA said in a speech to the Australian Chamber of Commerce in Shanghai.

"It reflects the broader economic relationship between China and Australia and our increasing financial ties.

"It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets," he added.

Experiment

China has been slowly opening up its tightly controlled financial and capital markets, to try and spur a fresh wave of economic growth.

Last year, it raised the investment quota for Qualified Foreign Institutional Investors twice to give them greater access to its markets.

At the same time, it has been loosening its grip on its currency as part of its attempts to internationalise the yuan.

It has announced plans to set up a special business zone in the southern city of Shenzhen to experiment with the yuan's convertibility.

It has also widened the range in which the yuan is allowed to trade against the US dollar, from 0.5% to 1.0% on either side of a daily rate set by the People's Bank of China, the Chinese central bank.

Analysts have said that all these moves are a part of China's push for a more global role for its currency.

Beijing has been trying to promote the yuan as an alternative to the US dollar's status as global reserve currency.

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