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Ballantyne, A., Hambur, J., Roberts, I., & Wright, M. 2014. RDP 2014-10 Financial Reform in
Australia and China. Reserve Bank of Australia.
Summary
In line with the topic of the research paper, the authors explore the financial reforms in
Australia and China. The paper is divided into three major parts where the first part examines the
financial reforms experience between the 1950s and 1980s of Australia. The development of the
banking supervision and market hedging has also been discussed. The second part examines
Chinas financial system reforms, which mainly covers the expanding financial system, and the
financial reform agenda. The last part is a comparison of financial reform in Australia and China.
It was difficult to manage and control the exchange rate and the local monetary
conditions due to the gradual transition of the flexible exchange rate that was also linked to
Australian Financial market development. As a result, series of financial reforms were adopted to
find a solution to these challenges. The main significance financial reform of the 1950s and
1960s was the replacement of the UK sterling pound exchange rate with the US dollar by the
Australian government. This was done to open up foreign investment in the country. Ballantyne
et al. (2014, p. 11) noted that prior to this reform, all foreign currency transaction was highly
restricted. This hindered foreign investment in the country that was necessary for economic
development. The adoption of US dollar allowed more foreign investment in the country but
restricted Australia from investing in foreign countries. Another reform was regulation on the
banking sector that imposed controls on bank lending, interest rates, and reserve requirements
that were used to implement monetary policy during the period.

In the 1970s, it was very difficult to control local monetary conditions, due to increment
in non-official capital inflows. The government had to lift all the regulations imposed on the
banking sector. However, this presented many challenges than before. The first challenge that the
country encountered was the management of capital inflow to the non-official sector. When the
International Banks penetrated the Australian market, they increased the local companies'
awareness of and access to overseas capital, consequently contributing to huge capital inflows.
Measures such as increasing bank reserve requirement did not materialize since non-banking
institution were offering the same services. The government had to deregulate the banks to
enable them compete fairly with the non-banking institution.
However, management of Australian currency to US Dollar continued to be difficult. As a
result, the country had to replace the US dollar peg to a trade-weighted basket of currencies. This
was a devaluation of the country's currency to US Dollar. Further, 1976, the country peg was
replaced with a crawling peg trade-weighted index, that was meant to prevent increase or
decrease in value of the currency. The main reforms done in the 1980s include the suspension of
banks foreign currency trading to give ample time to determine the direction to take. This was
done in response to large capital inflows that occurred due to speculation in changes of the
exchange rates. The second was the removal of capital controls whose purpose was to maintain a
fixed exchange rate.
They are two main developments that took place during the 1980s financial reforms. The
first one is supervision in banking services. Since the banks were used to lending only to
creditworthy clients, they did not have a risk management policy for high-risk borrowers.
Unfortunately, the removal of regulation opened competition in the banking sector. As a result,
banks were exposed to risky customers who failed to pay the loans. There was the need to

develop risk management strategies for banks and regulators (Ballantyne et al. 2014, 27).
Secondly, there was a need to hedge against foreign currency risk and the interest rate risk, this
led to the development of hedging markets.
The financial reforms that occurred in China were purposefully meant for transforming
the socialist economy to free market economy. This began by expanding the financial system
through; banking system and interest rate regulation, capital controls and exchange rate, the
growth of financial markets and banking sector fragility, and currency regimes and capital
controls reforms. The first reform occurred in 2013 when the People Bank on China abolished all
restrictions on lending rates, deregulating the banking sector. Less stringent capital controls were
also put in place to allow authorized foreign investors to invest foreign currency in equities,
bonds, securities funds among other financial instruments.
The author compares and contrasts the financial reforms in China and Australia from
three perspectives. These include the context of reform, the approach to liberalization and the
post-reform challenges (Ballantyne et al. 2014, pp. 41-45). In the context of reforms both China
and Australia imposed asymmetric capital controls, with tighter restrictions on foreign
investment outside the countries. On the other hand, Australia had a more open capital account to
foreign capital inflows than China. In terms of liberalization, the government of Australia oftenly
made reform decisions quickly in reaction to external pressure. On the contrary, the Chinese
liberalization was more objective and was implemented in gradual steps. Both China and
Australia experienced post-reform challenges such as the lack of experience by financial
institutions forming risks management strategies of borrowers.
Evaluation and Appraisal

It is not easy to examine all financial reforms done by both China and Australia.
However, this article adequately covered the major financial reforms and their impacts to the
economies of the two countries, which without saying helps to explain the economic disparity
between them even today. The step-by-step examination of financial reforms implemented in
Australia is very insightful in the country's economic walk. China, though beginning at a strong
point, the authors provide valuable information in understanding the challenges it had to conquer
to occupy the global position it has today.
Beginning with Australia, the author examines periodic financial reforms implemented by
the country. To begin with, the 1950s-1960s reforms, it is evident that UK sterling pound had
hindered foreign investment in the country. The emergency measures during the Second World
War made impossible for any foreign currency transactions unless approved by authorities. The
country could only invest in other countries, but no foreign country could invest in it. This
undermined the domestic development of Australia. Pegging Australia currency to US Dollar
opened opportunities for foreign transaction and restricted the country to domestic investment,
this was crucial step towards economic growth.
Similarly, the article points out how restrictive regulations on the banking sector in
Australia affected the development of its corporate bond markets. The 1970s financial challenges
experienced in Australia due to the inability of the country to implement the formulated financial
policy show how the government took narrow perspective in formulating these policies. For
instance, by applying strict regulations on the banking sector, it was difficult to implement the
monetary policy because the non-banking financial sector replaced the banks. This indicates that
most of this policies adopted were reactive to external pressure. Nonetheless, the authors also
show how these policies benefited and helped to stabilize the Australian economy. For instance,

when the government deregulated the banking sector through removal of quantitative control on
lending led to rapid growth in the credit rate. Therefore, apart from identifying the
unpreparedness of the Australian government, the authors also points out the benefits of the
policies implemented meaning that the policymakers might have been deliberate.
The article also explains in detail the major developments that occurred during these
reforms. The first remarkable development was the initiation of risk assessment and management
policy in the banking sector. This was necessary to prevent huge losses the banking sector was
making due to lending to credit unworthy customers. The last development, which also stabilized
the Australian economy, was hedging on markets. The article emphasizes that hedging of markets
led to the introduction of a tender system that was very transparent allowing government
securities to be priced by the market.
In analyzing the financial reforms in China, the article majors on policies of making
China a free market economy. The article explains that the government began by reducing
barriers of entry in industries previously owned by the state. In the mid-1980s, non-banking
financial institutions such as urban credit cooperatives emerged that offered financial services to
private investors replacing the People Bank of China. The People Bank of China was acting as
both the central bank and the only commercial bank. Establishment of private financial
institution stimulated rapid economic growth.
Another significant reform that the article puts particular emphasize is the deregulation of
interest rates. This reform gave commercial banks the flexibility in determining interest rates.
The government of China did this to encourage the banks to lend to small scale enterprises hence
promoting the economy. In contrary to Australia, the article states that China implemented its

series of reforms in systematic, proactive manner hence being in a position to influence its
economy.
In comparison and contrast of the financial reforms, the article divides it into three
categories that make it very easy to understand. For instance, the context of reforms explains the
similarities and differences in time and scope of the financial reforms while the approach to
liberalization explains the forces behind the reforms. In the case of Australia, most of the reforms
were accidental and reactive to external pressure. On the other hand, China engaged in deliberate
and objective financial reforms that influenced the direction of the economy.
However, despite insightful information provided by this article, it did not pay equal
attention to each of this country. The article has covered in depth the financial reforms in
Australia than it did to those of China. Secondly, the article also in explaining some reforms
especially for Australia went into detailed explanation sometimes drifting from the main theme.
Lastly, the article did not consider the aspect of time when presenting the comparison. Most of
China's reforms were implemented between the 1980s and 2000s while Australia did much of its
reforms in 1950s to 1980s. The economic and political factors existing at different times affect
the monetary policy formulated and how they are implemented. In particular, Australia began its
financial reforms immediately after Second World War when it was difficult to predict economic
trends. Therefore, due to the differences in time of implementation, a comparison may not
provide insightful information.