Research Paper A001322735

18th December 2014

The rise of the Renminbi and Australia: How will an international RMB affect corporate

financing and management decisions of Australian Banks?

Executive Summary

As China has progressively emerged as a dominant player in the global economy, it is

deliberately releasing its grip on the control and regulation of the domestic currency, the Chinese
Renminbi (RMB). Australia has historically been a large beneficiary of the strength of China and
other economies in the Asia Pacific region; therefore there is a need for research to be done in
regards to the implications that will become apparent from the inevitable rise of the Renminbi for
the Australian economy and the Australian banking system. With the new policy initiatives that
Beijing is recently making in regards to the RMB, China is set to challenge the big three
currencies, the USD, EUR and YEN. (Wu, Pan & Wang 2010) As debt financing by large
corporations have traditionally been denominated in USD, there is a need to analyse the changes
to debt financing if the USD did not dominate the global investment arena, and to investigate the
future of risk and management issues within Australian financial institutions

It is discovered that while there are many unknown dynamics that have to be taken into
consideration during the slow and gradual release of the Chinese Renminbi into the global
markets, there are specific issues that need to be considered if Australia is going to ensure it
benefits from the rise of this Eastern economic powerhouse, such as forward-thinking financial
and competitive strategic planning.

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Table of Contents

______________________________________________________________________

1.0 Introduction 5
2.0 Orientation 7
2.1 Literature Review 7
3.0 Data Collection & Analysis 14
3.1 Data Collection 14
3.2 Survey Analysis 16
4.0 Key Findings 19
5.0 Key Implications 22
6.0 Conclusion 25
7.0 References 26
8.0 Appendices 30

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1.0 Introduction

With the integration and the increasing globalisation of banking institutions and financial
markets, relevant trends between global currencies and economies have a large impact on
government policy and local institutions. The specific research challenge this proposal puts
forward is the rise of the Renminbi, and what this will mean to Australian banks specifically. The
proposal will briefly research the history of the Renminbi; though will predominantly focus on
the changes to debt policy, specifically concentrating on the WACC (Weighted Average Cost of
Capital) and risk management policies of domestic banks and financial institutions within
Australia.

As the Australian economy is a direct beneficiary of Chinas economic prosperity, Australian

banks will be affected by the policy changes both directly and indirectly, as well as the global
debt funding environment alterations due to the internationalisation of the RMB. It is important
for Australia to be well aware of the dynamics that will take place as China storms forward as an
economic powerhouse of the 21st century, as the dominance of the US dollar in a global economic
aspect - this paper suggests, will progressively start to be overcome by South East Asia.

There is a clear need for this Research Project, as while there is a plethora of information to be
found in regards to both domestic capital financing along with studies into Chinas push of an
international RMB, the effect of an international RMB to capital financing decisions for
Australian banks has not been strictly considered in current academic literature.

The research project will aim to provide financial institutions a clear and well-researched
benchmark into the anticipated changes that will occur over the next two decades due to the
Renminbi becoming a global world reserve currency. The project is designed to also invigorate
further research into the domestic implications from academics and practitioners, as it is argued
that there is a clear lack of academic discussion that has been carried out specifically looking at
the fundamental capital changes that will occur to Australian banks.

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To understand the implications for Australian banks resulting from the Chinese account
liberalisation, a broader analysis of the effects of an expected appreciating use of the RMB is
required. This research project will attempt to analyse the change in the global dynamics, terms
of trade and the ever-important transformations to the onshore and offshore bond markets.

Following on from the research and discussion within this paper, the following research indicates
the bond market will undergo various changes over the next twenty years, and foreign direct
investment between both China and Australia will dramatically increase. Surprisingly, the
influence to the domestic banks WACC was discovered to be minimal, however there is a vast
array of indirect influences which will change the financial landscape for all banks operating
within Australia in the future.

The implications to the Australian Banking system are seen to be predominantly positive, with
increased liquidity in debt markets, as well as an extended range of hedging and financial
derivatives adding to an arguably more robust global financial system with improved stability and
liquidity, especially in any future global financial crisis.

This research paper aims to complement current literature in corporate finance, as well as adding
to the academic research on the South East Asia economic dynamics, while hopefully provoking
further research and analysis into the direct impact of the Chinese Renminbi to Australia.

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2.0 Orientation

Initially, a brief literature review was carried out in regards to the academic information available
in regards to the rise of the Renminbi. While there was sufficient information about China and the
implications for a new global reserve currency, there is a clear lack of research carried out in
regards to the ramifications this would have to the Australian banking industry. The literature
review was mainly carried out through a deductive approach, where the various sources were
analysed to learn about different theories that could be used to answer the research question
stated. Saunders, Lewis & Thornhill (2009) state that a deductive literature review is where
theories and ideas are analysed for the purpose of testing and analysing data to answer the
research question proposed. Appendix 8.1 illustrates the predominant thought process that was
used for the literature review in this particular research project.

From an extensive literature review that was thus carried out covering the RBAs publications,
reports by the Peoples Bank of China and other influential academic research and working
papers, there is sufficient evidence that the rise of the Renminbi will certainly come to fruition,
and become a large player in the global currency market in times ahead.

The questions below used to guide the literature review are critically important as this paper
states there are two broad, key areas in which the RMB is a catalyst for a dynamic shift in the
Australian economy the change to the Australian Dollar (both short term and long term), and the
change to the cost of debt (especially corporate long term bonds)

2.1 Literature Review

China has proved to be an economic powerhouse in recent times, though has to overcome many
challenges to successfully integrate the Eastern economic markets to the West. China has
culminated a long, overall successful reform and growth experience by growing exceptionally
fast during the 2003-2008 period, with GDP (Gross Domestic Product) averaging over 6% during
this time. (Kuijs 2012) As Australia is a large beneficiary of Chinas growth and general
economic well-being, the currency being allowed to trade in a free market is of critical
importance to domestic Australian Banks, as this will open the historically closed doors to China.

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The key paper by Plumb, Kent & Bishop (2013) discussed that strong economic growth in the
Asian region, particularly in China, over the past decade or more has had important
macroeconomic and structural effects on the Australian economy. Most obvious has been the rise
in the terms of trade to historically high levels, a resource investment boom, the appreciation of
the exchange rate, and the reallocation of productive factors, with employment growing strongly
in resource and resource-related activities and declining in a number of non-resource industries.
The Bank for International Settlements illustrates in Appendix 8.11 that the rise of RMB FX
trading would dramatically increases once the RMB become fully convertible.

There are many challenges facing China to create a successful international currency from the
Renminbi, and this will not - and cannot be a fast revolution, rather though a structured and
strategically planned evolution. For the Renminbi to become an international currency it should
first be noted what this research paper considers as an international currency. An international
currency is referred to as a currency that is willingly, readily, and commonly used to conduct
international transactions. (Chen & Cheung 2011)

The global currency market and the Renminbi

Many papers look closely at global capital account liberalisation, with Fischer (1998) stating,
Free capital movements facilitate a more efficient global allocation of savings and help channel
resources into their most productive uses. The paper also continues to state that governments all
over the world borrow in the Euro-markets, which can provide cheaper access to financing then
the domestic markets, and so is the same for domestic corporations. This research paper will
continue to discuss the ability of domestic banks to use international funding to lower debt
financing costs, focusing on the assumption that China continues to open up the capital accounts
to the outside world. The debt funding research will also refer to theories and methods from
(Brealey, Myers & Allen 2014)

The liberalisation of the Chinese Renminbi was always imminent from the large trade between
China and other countries throughout the globe such as Australia, US and Europe, however it was
not until the outbreak of the global financial crisis that RMB internationalisation became publicly
vocalized by China. As early as March 2009, Chinese central bank governor Zhou Xiaochuan
called for reform of the international reserve system to become less reliant on the US Dollar.
(Ardelean & Zhang 2014).
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Park & Song (2011) state that the RMBs internationalisation is therefore expected to follow a
three stage process: (1) used as a currency for pricing and settlement of bilateral trade with
China; (2) used for denomination of globally traded financial instruments; (3) then used by other
countries for a reserve currency. While this research paper will discuss the challenges that China
faces in internationalising the RMB, as this research paper is focused on the capital financing of
Australian banks, only a brief summary will be deliberated.

Rouse et al. (2011) specifically look into the methods and challenges that will need to be
overcome to create a new global reserve currency, and this work raises some important issues
that this research paper will investigate further, such as the US not remaining as the default world
reserve currency as the G20 and the International Monetary Fund (IMF) appear to be now
considering a separate, hybrid reserve currency - such as the Special Drawing Rights (SDR).
Further research into the SDR challenges and impacts on corporate funding are recommended as
beneficial to this research paper.
There are also many academic papers regarding the value of the RMB, which this paper will be
required to research in regards to the effect of the AUD/RMB exchange to the domestic
Australian economy. Yoonbai (2010) analyses the current accounts to study the RMB value and
the formulas that this report will look further into from the paper by Yoonbai (2010) are found in
Appendix 8.2.

Fung, Wu & Yau (2013) discuss that as more dim sum bond indices and exchanges are opened
across the globe, investors are expected to consider including RMB-denominated assets as an
alternative investment asset class, thus helping to promote the global acceptance of the RMB in
the investment arena. The rise of these RMB denominated debt instruments is of particular
interest to this research paper as bonds and corporate debt are an integral part of corporate
finance. The cost of issuing bonds in RMB is regarded as relatively low, and once all the
limitations have been removed in regards to transferring RMB to the mainland this is set to
increase demand and change the yield curve of these bonds. (RBA 2012) Appendix 8.3 illustrates
recent bond prices for the RMB, showing that difference between the spreads of the CNY, (which
is offshore denominated currency), compared to the RMB in fact are decreasing as China moves
forward with the RMB deregulation.

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There are two distinct pathways that Ardelean & Zhang (2014) discuss in which China can
internationalise the RMB. The first pathway prioritises domestic financial development and
reforms. Only when the financial market matures can RMB internationalisation feasibly follow.
The second pathway recommends opening the capital account substantially and using it as a
driving force for domestic financial liberalization and development. The first pathway is
considered rather cautious, while the second pathway is criticized as being too risky. Considering
the points above, Chinas cautious and stepped approached, slowly creating international RMB
trading hubs this research paper believes is the most logical, stable and controllable approach.

The need for an alternative global reserve currency

As smaller, emerging markets increase their demand for international dollars from the United
States due to increasing economic transactions requiring offshore funding, naturally the US
account deficit will increase. The larger the increase in current account deficit therefore also
decreases the confidence in the US Dollar, resulting in what is famously called the Triffin
Dilemma. (Huang 2010) modestly states the Triffin Dilemma is caused when a country is forced
to run a current account trade deficit to provide risk free funding to other economies, and in doing
so over time runs the risk of its currency, as well its economy running into issues and being
downgraded due to the instability predicted from the increasing deficit created. When China
releases its grip on the Renminbi, thus creating another global reserve currency, the demand for
the US Dollar is expected to decrease, thus minimising the catalysts which cause the Triffin
Dilemma. Appendix 8.12 shows just how dominant the US Dollar is, accounting for over 60% of
the total FX reserves across the globe.

When will the RMB become a genuine dominant currency?

Just how soon will the Renminbi become a solid player in the global reserve currency game? A
comprehensive paper by Lee (2014), states Simulations show that once the currency were to
become more convertible, the Renminbi can gradually grow to become an international currency
within the region and beyondsharing from about 3% to 12% of international reserves by 2035
While this does not sound like a large amount, compared to the current proportion of global
reserve balances of approximately 1.6%. (Wong 2014), this is a significant increase. Appendix
8.7 shows the potential for China to integrate financially with the global markets, with a clear lag
of financial integration compared to global trade and GDP.

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What is the equilibrium value of the Renminbi versus the Australian Dollar?
As Lipman (2011) discusses, because the Chinese Renminbi is not traded in a free market, there
exists no clear market equilibrium value of the exchange rate. The real value of the Chinese
Renminbi is hard to accurately determine, and Sato et al, (2012) state that there have been
numerous studies attempting to come to a true valuation for the Chinese Renminbi against other
world currencies, such as Purchasing Power Parity, behaviourial equilibrium exchange rate as
well as the fundamental equilibrium exchange rate approach, which all bear different results.

Chu (2005), illustrate from a brief periodical regarding the RMB that the demand for a currency
stems from three major sources; to buy goods or services with the currency, invest in physical or
financial assets and to speculate on moves in the exchange rate itself.
Chinese exports will suffer catastrophically if the RMB appreciates too drastically, which
explains some of the reasoning behind Beijings cautionary approach towards a deregulated RMB
with the rest of the global economy.

Will a fully tradable RMB change domestic equity prices?

Australia historically as well as geographically has close ties to China, as well as greater South
East Asia. A fully tradable RMB will open up many opportunities for the rising middle class of
China to confidently invest in overseas equity markets across the world. The discussion paper by
Thirlwell (2011) states that some 44 million Chinese each year are joining the urban Chinese
population as a demand driven commodity super boom creates wealth and an increasing pool
of Chinese with disposable income. Upon searching for data that considers the implications for
Australian domestic financial markets form the rise of the Renminbi very little, if all
information is found in current academic literature.

Australia has a strong banking system, which the four pillars policy has helped create, with the
top four Australian Banks (ANZ, WBC, CBA and NAB). A result from the 1997 Wallis Inquiry
was a change from the 6-pillar policy to the 4-pillar policy, stopping any mergers or acquisitions
of the four largest banks in Australia. (Paul & Kourouche 2008)

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Fabbro & Hack (2011) state that while banks in Australia enjoy a diverse funding base, there has
been significant change, reflecting a reassessment of funding risks from both global and
regulatory shifts. The Global Financial Crisis was a telling time for the Australian economy while
the Australian banks were left mainly unscathed in the short term, from the global economic
turmoil. While this research project does not aim to analyse debt structure theory, a brief analyses
of the methods used in which organisations come to a capital structure conclusion will be
discussed.
Both debt and equity play a dynamic and frequently debated role in the weighted average cost of
capital, the formula being;

WACC = rD * (1-Tc) D/V + rE * E/V

Australian banks can therefore choose to raise capital by issuing equity in the company, or by
raising debt, which is done via bonds and other debt securities. This research paper will therefore
will investigate the changes to debt issuance and the dynamics to the debt market, as well as what
changes if any, can be foreseen to the cost of equity for Australian financial institutions. It is
important to note however that the output the WACC formula provides is a weighted average of
the debt (minus tax benefits) and equity costs the organisation incurs.

Does debt structure matter?

The ever-famous Modigliani and Miller Theorem 1 indeed suggest that debt structure does not
matter. Modigliani and Miller state, the market value of any firm is independent of its capital
structure (Brealey, Myers & Allen 2014) why then do companies spend so much time, and
invest large sums of money to reach and maintain a specific debt to equity ratio within their
capital financing? In an imperfect world, where all organisations actually conduct value adding
business, the debt to equity ratio can indeed change the value of the firm. As this research project
is aimed at answering the question: what changes will be likely for Australian banks with the
increase of the RMB as a trade currency the research project is therefore not concerned with the
reasoning behind a specific bank choosing its capital structure, as to the changes to the capital
structure.

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What is the current state of debt funding within Australian Financial Institutions?
The primary cost for financial institutions is the cost of obtaining the funds that they use to lend
to households and businesses to support a growing Australian economy. Banks source their funds
from deposits, wholesale debt markets, securitisation and equity (Australian Bankers Association
2013) this research paper is not as such focused on the securitisation and deposit markets in
which banks raise capital, however it is important to note that these will possibly change with the
movement of the Renminbi to a global reserve currency.

While the above section has thoroughly investigated the current academic literature and corporate
research into the rise of the Renminbi, there is a clear gap of research in regards to the foreseen
implications of the Australian financial market, especially domestic banking institutions due to
the rise of the Renminbi.
In summary, this research project aims to close this gap, by providing a local qualitative survey
on the attitudes of high-level managers to the impact of the RMB to the Australian economy, as
well as to analyse the expected changes and dynamics of a fully convertible RMB.

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3.0 Data Collection and Analysis

The main data that this project utiillises to come to the findings of the research is created from the
annual reports of Australian Banks and Credit Unions. The financial data was collected to
develop the Weighted Average Cost of Capital (WACC) for the financial institutions, which
creates a picture on the implications from a corporate financing perspective resulting on the RMB
becoming a global reserve currency. The second part of the research undertaken for this project is
a qualitative survey on the views of the implications of the Renminbi to Australian financial
institutions from influential financial managers from across many different organisations, such as
Fund Managers, Private Wealth Managers and Banking Analysts.

3.1 Data Collection

The first part of data collection involved fundamental quantitative analysis, using the publicly
available information sourced from annual reports of 11 banks within Australia. The information
that was extracted from these reports was used to develop the cost of capital and debt, to assist
with calculating the Weighted Average Cost of Capital for the 11 banks. As this research project
is concerned with the implications to the capital structure of Australian banks from the increasing
use of the Renminbi as a globally traded currency, developing the WACC was crucial to
understanding the debt and equity levels of Australian Banks. Appendix 8.4 shows the
information used to develop each WACC for the 11 banks involved in this study. The influential
Capital Asset Pricing Model (CAPM) was used to develop the cost of equity for the banks, with
the calculation for the CAPM below;

E(r) = Rf + B [E(m) Rf]

Rf was chosen as the 10 year average 90 Bank Bill Loan, considered for this project to be the best
indicator of a risk free rate of investment, which was discovered to be 4.67%. The expected
return of the market was decided at a rate of 9.59%, which was the average 10-year return of the
AUS200 index over the same time period. (Morningstar 2014) As this project is not specifically
concerned with debating the calculations behind the WACC, all other data was collected from
sources such as the annual reports of each company analysed, located from their public website.

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Betas were used from a secondary data source, being gathered from the financial analyst tables of
the ASXIQ (2014) website. As seen in Appendix 8.4 the average WACC for Australian banks is
approximately 6%, with AMPs WACC being over 10%. This research paper considers AMP an
outlier for the purpose of this project and will not attempt to look further into why AMPs WACC
is considerably higher than the other banks, other than state the cost of AMPs equity is
considerable higher than other banks, causing the overall cost of capital to increase. While
working out of the cost of debt, many literature reviews suggest simply dividing the debt expense
by the amount of debt on issue. This research paper believes this is not a true reflection on the
real cost of debt for an organisation, as interest expense ratio is not an accurate reflection of a
corporations true cost of debt. The average coupon currently paid by a corporation is the result
of yields and credit ratings at the times of issuance, and may not reflect the market environment
or corporate credit quality of the organisation. (Pettit, Badakhsh & Klein 2005) Westpac
Institutional Banks corporate debt instrument sheet is used to derive the cost of debt for the
financial institutions used for this paper, and can be found in Appendix 8.4.3.

It is extremely important to note however that banks vary significantly as opposed to other
institutions that need to raise capital. Not many other institutions within the country have the
ability to raise funds from customers, ultimately selecting the price they are willing to pay for
those funds, which is also dependent on market conditions and consumer sentiment etc. Appendix
8.3.1 illustrates the sources of banks funding over a historical time period. Appendix 8.4
illustrates the data derived from the analysis, firstly showing the methodology used to derive the
WACC in Appendix 8.4, with graphs supplied in additional appendixes 8.4.1 and 8.4.2 for visual
representation of the WACC and Cost of Debt for the financial institutions studied.
As this research paper is more of a discussion rather than a technical review of capital structure
management - which there is a wide variety of literature on capital structure theories, including
the well-known Modigliani and Miller Theorems, this research project informs the readers the
cost of debt and equity was collected to provide information specifically on the difference
between the big four banks compared to other institutions within Australia.

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While a large amount of research into the actual makeup of the cost of the Weighted Average
Cost of Capital is available for the reader, this research project states that the cost of debt is of
specific importance for the smaller financial institutions as they cannot rely on a steady and
robust customer deposit funding source that the other larger banks enjoy.

3.2 Survey Analysis

Qualitative data was also sourced from the use of a survey, as during the research for this project
there were no primary sources in regards to the general consensus on the rise of the Renminbi, as
well as the implications from the RMB to the Australian financial sector. The 67 surveys were
verbally as well as electronically administered to key decision makers and general managers in
many different industries. The questions of the survey were specifically chosen to gauge
influential managers opinions on the importance of the increasing use of the RMB as a global
reserve currency, and to analyse the current thought process on changes that would take place in
the domestic economic environment. Appendix 8.5 shows the questions that were constructed for
the purpose of the survey. After the results were compiled and investigated, a more thorough and
targeted interview was conducted with Peter Pontikis, the Director of Private Wealth and
Investments for Westpac Private Bank Queensland. While the survey results let this research
project learn about the general consensus of the Renminbis impact to the domestic Australian
financial market and businesss, the direct interview with Peter Pontikis was beneficial to this
research project to dig deeper into concerns and to gauge the general view of a high level
manager within the Private Wealth industry.

Wanting to achieve a more in depth understanding of the implications that are happening
currently, as well as into the future for Australian banks, Nathalie Antoine the Associate Director
of Foreign Exchange specialising in the Renminbi Market, was interviewed from Westpac
Institutional Bank in Sydney over the phone. A more in depth follow up interview in person at
Westpac Institutional Bank in Sydney was also completed for this research project.

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From the results of the general survey conducted, the respondents clearly illustrated that there
was an expectation that the globalisation of the RMB would have an impact on their business or
business unit. The breakdown of the survey results, which are discussed, can be seen in Appendix
8.6. From the survey conducted, it is evident that managers expect the risk management parts of
their business to change on a minimal basis due to Chinas account liberalisation, and also
expect this change to be a positive influence to their business.

All signed authorities for this research paper can be sighted in Appendices 8.20 through to 8.22.

What is somewhat alarming is that 68% of managers who believe there will be a positive impact
to their business in the next decade from the rise of the Renminbi, are not taking any actions to
set strategic plans, ensuring that their business takes advantage of the Chinese currency
liberalisation.

Further analysis into the questionnaires that were collected for the purpose of this research paper
show, that the top 4 utmost critical issues that managers believe will affect their business from the
integration of the RMB into the broader currency market and economy are;

- Increased overall currency market volatility in the short term

- New opportunities for financial derivative products
- An increase in business risk
- Increased Investment from China within Australia

As the surveys conducted were only brief, and in depth explanations on the opinions of the
managers who partook in the survey were not collected, Nathalie Antoine was questioned further
about the four prominent findings above from the survey. Nathalie commented on the first point
that initially markets would become more volatile as the currency was released from the
boundaries that it currently is allowed to trade within.

Nathalie also commented that she expected an increase of corporate and institutional investment
from mainland China in Australian industries, especially the mining industry and the iron-ore
segment. In the early stages of the internationalisation of the Chinese Yuan into the global
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economy, there will be increased business risk, relative to the risk born by traders in other
currencies, such as the USD. Nathalie also stated that Westpacs belief is that the Chinese trade
will double in size by the year 2020, and the Chinese RMB settlement market will gain 30% of
the share of transactions.
Appendix 8.19 followed by additional appendices, illustrate Westpac Institutional Banks view on
the Chinese Renminbi, and notes that Westpac believe the RMB to become fully convertible by
the year 2017.

Delving deeper into the conversation in Sydney, it was evident that while Westpac Bank had
obviously taken the lead with CNH clearing along with ANZ earlier this year, it appears that this
is merely a reactive policy, and that institutions and corporations are only informed of the
capabilities of Westpacs RMB trading ability if this is specifically asked for.

Lewis McIntyre, Director of Private Wealth in Brisbanes Private Wealth department, was
excited at the opportunities having a fully convertible RMB, in regards to the SIV (Significant
Investment Visas), as this will provide a larger propensity for Chinese and other Asian investors
to look to migrate or invest within Australia, once the uncertainties of the currency dilemma are
solved and the Chinese Government releases its hold of the Renminbi.

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4.0 Key Findings

Form the extensive literature review that has been carried out, in addition to the quantitative and
qualitative analysis; there are several key findings that this report will summarise below. There
are many determinants it is discovered that influence how an organisation decides to structure its
debt/equity ratio.

Reduced Systematic Risk Long Term

As Pettit, Badakhsh & Klein (2005) state in a comprehensive paper, increased globalisation in
worldwide capital markets improves liquidity and therefore also decreases net volatility.
Appendix 8.8 illustrates the historical MRP (Market Risk Premium) over long-term bonds as
discussed in their paper. A fully convertible RMB would provide investors, as well as corporate
and institutional investors full disclosure and transparency with the Chinese markets, providing
liquidity to foreign investors without the need for excessive currency transactions, which both
add costs and risks to investors. A flexible RMB will allow China to conduct independent
monetary policy with an open capital account and help minimise the impact of fluctuations of
major currencies, especially the U.S. dollar's movements against other global reserve currencies.
(Chu 2005) Appendix 8.8 is supplied to show that the market risk premium for long term bonds
has decreased significantly in the past 50 years, reflecting the increase of globalized capital
markets.
In the short term however, the currency risk faced by Australian financial institutions that can be
cumulative and compounding, is expected to increase from the general unknown consensus of the
short-term future of the RMB. Appendix 8.2.1 shows multiple international risks, which affect
the Weighted Average Cost of Capital for organisations.

Increased Global Bond Market Size

Also, with increased demand for investment from Chinese and other investors from across the
world, the Australian corporate bond market is expected to increase in size allowing companies to
issue debt at a cheaper price, due to the increased demand. At the moment, by referring to
Appendix 8.17, there has been a decrease in offshore bond market purchases from overseas
investors, with this figure slightly increasing from 2013 when the RMB became convertible (with
only ANZ and WBC being provided licenses to become market makers at that instance)

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The reason this research paper states for the sudden decrease in Australian bond purchases, was
the general global economic downturn caused by the Global Financial Crisis.
There are currently talks to open trading hubs in Singapore, Sydney, South Korea and Paris
which will allow a more robust and available bond trading market worldwide.

Dynamic Global Currency

Evident from the interview with Nathalie Antoine was that the Chines RMB would become a
much more dynamic currency then that of the USD or the EURO. As Ardelean & Zhang (2014),
state, RMB internationalisation has direct implications for the rest of the world. Globally, it will
add to the diversity and complexity of the financial system the international monetary system
in particular. Specifically, Nathalie Antoine believes that while the Renminbi may not become
the global reserve currency, it will create a bi polar market where there is much more ease of
access, and visibility with the cost of funding with both banks and corporations worldwide.
(Nathalie Antoine 2014)

Increased Demand for Australian Exports

As the Renminbi is expected to increase in value against the USD, AUD and other global
currencies the Australian dollar - this paper suggests will become devalued against the Renminbi.
As discussed in the previous section, the exact equilibrium price is unknown, and will continue to
be until the Renminbi is allowed to float freely with other currencies, without being chained
down by China. Appendix 8.9.1 illustrates the recent changes in the interest rate from the CNY to
the USD, showing a steadily increasing strength of the Chinese currency.

Lack of Strategic Risk Management

Prasad & Lei (2013) state that they believe that the Chinese Renminbi will become a global
reserve currency within the next decade, not overriding the USD although complementing it. Lee
(2014) states in a periodical regarding the rise of the Renminbi that until more offshore hubs are
opened up across the world to provide 24 hour a day access to trading in the Chinese Yuan,
unnecessary transaction risks could be born. This paper suggests when the actual current account
has been fully opened - there may not be a need for offshore trading hubs at all. While both ANZ
and WBC are market makers with authority provided by the Peoples Bank of China this risk is
minimised, however referring to the survey analysis that was carried out for this research paper
there is a clear lack of strategic formulation and planning over the next 5 to 10 years in regards to
18 | P a g e
Research Paper A001322735

Mainland China opening up the capital accounts. The lack of strategic management is evident in
the survey that was conducted for this research paper, which was discussed previously.

Greater Awareness of RMB Trade Settlement is required

While it is seen during the literature review that Australian companies are well aware of the rise
of the RMB though are not necessarily taking the steps to take advantage of the changing
dynamic, many small private firms in China lack the understanding of the ability to settle trades
denominated in the Renminbi, as shown in the working paper by Walsh (2014)

Australia could also benefit from providing funds management services to Chinese investors as
private outward capital flows from China increase, however there are some key challenges that
Chinese residents will face before privately held funds can freely move between China and
Australia. During the interview with Nathalie Antoine, she explained that Chinese financial
markets are one of the most extremely regulated markets within the world, and until China can
internally remove the corruption within the markets such as insider trading and embezzlement,
private funds will continue to be restricted. Nathalie continued to say that China has many
challenges it faces to be able to regenerate trusted markets and have a need to internally
restructure cultural problems within Chinas financial markets.

The amount of RMB trade settlement has increased rapidly, from three percent in 2010 to 11
percent in 2013. (Ardelean & Zhang 2014) This paper suggests there will be exponential growth
for the next decade as further activities are progressively conducted from the Peoples Republic of
China to deregulate the Renminbi. The influential paper by De Meijer (2012) shows that RMB
cross-border trade settlement went from 369 Billion RMB from 2010 to over 1915 Billion RMB
in 2011, a 518% increase in one year.
After carefully revising the interviews that were conducted for this research paper, there is an
overwhelming lack of intentional strategic planning in regards to the integration of the Chinese
Renminbi with Australian markets.

Moving one step further, this paper suggests that the Chinese Renminbi and their capital account
liberalisation should be a mandatory subject for all business school students, to ensure that the
next generations of business leaders understand how to navigate this new dynamic in global
capital markets
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Research Paper A001322735

5.0 Key Implications

In the previous section of this paper the expected changes to the domestic and global economic
system were analysed and discussed, however what does this specifically mean to Australian
Banks and the Australian economy? There are some key direct implications this research paper
has discovered from the above analysis, as well as some indirect implications that are briefly
covered toward the end of this section.

Wider Source of Funding Opportunities

Both the European and American markets have primarily provided offshore funding pools
available to domestic banks within Australia - with Appendix 8.9 illustrating the main source of
offshore bond issuance from Australian Banks. As Fung, Tzau & Yau (2013) state - large
corporations such as McDonalds and Unilever have already taken advantage of the dim sum bond
market, and once China progresses on the road to currency liberalisation by enhancing the
offshore RMB investment opportunities for investors to trade and invest in RMB this will greatly
facilitate the liberalisation of the Chinese currency with the rest of the world.

As discussed in the previous section, smaller banks are argued to benefit the most from the
liberalisation of the RMB, as they are seen to generally have a slightly higher cost of debt then
the larger banks. The smaller the market capitalisation of the financial institution this paper
suggests, the higher the cost of debt as generally the institution will be stipulated with a lower
rating from global credit agencies such as Moodys and/or Standard and Poors. As the credit
rating decreases, investors will demand a higher return for the same associated risk of the
company, therefore increasing the return required on the debt security, in turn increasing the cost
of debt to the company wishing to raise the funds. Appendix 8.10 shows the current credit rating
by Standard and Poors of the Australian Banks, which were used in this research project.
Appendix 8.13 illustrates that while China issues a large amount of corporate bonds, in 2004 well
over 90% were government bonds. Moving forward to when the RMB is traded as a global
reserve currency, this profile of Chinas corporate bond issuance will dramatically change,
providing both more funding opportunities within China, and organisations across the world to
invest in these debt instruments.

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Research Paper A001322735

Cheaper Debt Financing Costs

Common economic theory reiterates that when there is more supply of a product, commodity or
service there will ultimately be a decrease in price for that same instrument. With the increasing
issuance of RMB bonds offshore in Hong Kong and other global RMB trade centers such as
London, Paris and soon to be announced Sydney (Westpac Institutional Bank 2014) the overall
pool of funds as well as investors willing to invest in a wider range of debt.

Will this ultimately cause the debt costs of the major banks within Australia to become less? This
research paper was aimed to answer this question and does admit there was unknown
shortcoming in answering this ever important question. There are much more indirect catalysts in
which will change the Australian financial landscape which this research paper recommends are
studied further. While it is seen in the earlier part of this research project that it is not only the
cost but the weighting of the debt which contributes to an organisations WACC, the output in the
form of lower WACCs is expected to change little from the perceived savings of debt finance
from a larger pool of global bonds.

Increased Foreign Direct Investment

Chinas FDI has increased exponentially since late 2003, when the capital account first begun to
open up. Appendix 8.18 illustrates the sudden rise in outward foreign direct investment from
Mainland China compared to the rest of the world. While this paper suggests this would mainly
be due to corporate investments and institutional investors, due to the regulatory environment
placed on the Chinese markets, over time once the current account is opened up and culturally the
market is renewed with confidence, more private and individual investors will add to this outward
FDI figure.

Decreased Transaction costs with China

Instead of Chinese companies billing the other counterparts in the transaction in USD, they will
be able to directly invoice in the Chinese Yuan creating a more stable and predictable cost of
doing business in Mainland China, and this research project believes a substantial rise in
consumer confidence. Instead of having to process transactions through the offshore currency the
CNH, (which commonly demands a 2% premium over the Mainland currency the CNY),

21 | P a g e
Research Paper A001322735

transactions will be able to flow freely between countries. This assumption had a lot of variables
and geopolitical issues that have to be resolved before this comes to fruition.
Increased Competition for Australian Banks?

On a more of a forward thinking approach, with a fully convertible Renminbi, this could also
provide Australia and other Asia-Pacific regions with more competition from overseas foreign
banks operating out of Mainland China. The regulatory requirements and reviews that the current
Australian government decide upon will have a large impact on the future of mergers and or
acquisitions of the current Australian Banking industry. As well as the threats of mergers, banks
also will need to compete for the exponential growth in RMB payments across the world.
Appendix 8.16 illustrates the year on year growth of the top ten RMB regions across the world.
Australia is seen to only share 1.1% of total RMB trade, however this amount was 287 billion
dollars in 2013.

Ancillary Impacts of the Increasing Strength of China to Debt Raising

An important implication on the broader Australian economy - is that due to large financial
institutions being able to fund debt more cheaply than previously before ceteris paribus, a larger,
more profitable financial sector may better serve the domestic non-financial sector by reducing
the cost of capital and widening the set of financial institutions that are willing and able to
provide it. (Kenen 2011)

Looking back through the literature review and the data that was collected for this research
project, it is also suggested that equity may become less favourable as the Renminbi becomes
more liberalised. As shareholders usually prefer companies to raise dividend payments from
retained earnings, with the third global reserve currency with an increase in investors within the
market place may place more volatility on the equity market, causing more uncertainty for
organizations to raise funds via equity issuances.
Looking further ahead into the deepened capital markets assuming the Chinese Renminbi is fully
convertible this research project also believes that smaller financial firms such as micro finance
companies will be able to raise debt, not so much at a cheaper price, however will have a larger
pol of investors willing to take on the increased risk.

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Research Paper A001322735

6.0 Conclusion

It is important to note that the rise of the Renminbi as a global reserve currency is and will
continue to be a steady evolution of the financial markets, not a drastic revolution. Certain
limitations and issues for the Chinese economy are needed to be overcome for the Renminbi to
truly become a global reserve currency. One interesting development to be mindful on is the
geopolitical environment and just how quickly the Chinese Renminbi will join the financial
markets as a global reserve currency.

From the extensive research that was carried out for this research project, it is proposed that the
rise of the Renminbi will be a mainly positive dynamic in the global economy, being specifically
beneficial to the Australian financial system, as well as the broader Australian economy including
smaller financial institutions. Due to the expected increase in liquidity debt financing costs
associated with another global reserve currency to raise debt in, coupled with the strong growth
of the Chinese and other South East Asian economies, it is expected that the Weighted Average
Cost of Capital will therefore decrease in the long term, this paper suggests ceteris paribus
creating a decreased lending cost for clients of Australian Banks both corporate and retail. The
time frame for this outcome was not within the scope of this research paper and is recommended
for further research. It is important to also note that there was not sufficient information as yet to
conclude if Australian equity markets and the risk free rate would change significantly from the
introduction of a third global reserve currency.

While the survey that was conducted did illustrate that managers are expecting a rise in business
trade, in a positive direction from the increasing use of RMB for settlement this paper suggests
more importance should be placed on the planning of the evolution and integration of the Chinese
currency with the rest of the world. Further research is therefore recommended to extend this
paper, considering the financial and geographical ties between Australia and Mainland China.

It is trusted that Australian banks will aim to be involved more proactively in the future, to take
advantage of this global shift towards the rising Eastern political and financial powers.

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Research Paper A001322735

7.0 References

AMP 2014, Financial and Annual Reports, 2013 Annual Report

http://shareholdercentre.amp.com.au/phoenix.zhtml?c=142072&p=irol-reports, viewed 3 October 2014

ANZ 2014, Financial Analysts Toolkit, 2013 Annual Report

http://www.shareholder.anz.com/pages/analyst-toolkit, viewed 3 October 2014

Australia Bankers associate (2013) Bank Funding Facts and Figures

ABA116817v1WebsiteBankFunding_revised_for_web%20(1).pdf, viewed 24 October 2014

Ardelean, R. D., & Zhang, M. (2014). Power Shift and Renminbi Internationalization: Recommendation
for the G20. CIGI Junior Fellows Policy Brief No12, July 2014

ASX 2012, Media Releases Heritage Bank, Standard and Poors Rating
http://www.asx.com.au/asxpdf/20120607/pdf/426q33lj4dzy7q.pdf, viewed 24 October 2014

ASXIQ 2014, Beta 1 Year Pro Metrics, http://asxiq.com/statistical-rankings/end-of-day/top-stocks-

ranked-by-beta/, viewed 3 October 2014

Battelino, R., & Chambers, M. (2006). An overview of the Australian corporate bond market. BIS Papers,
(26), 45-55.

Bendigo Bank 2014, Bendigo and Adelaide Bank Financial Results , 2012/2013 Annual Report
http://www.bendigoadelaide.com.au/public/shareholders/financial_results.asp, viewed 3 October 2014

BOQ 2014, Annual Reports, 2012/2013 Annual Report

http://www.boq.com.au/shareholder_annual_report.htm, viewed 3 October 2014

Brealey R, Myers S, and F Allen 2014, Principles of Corporate Finance, 11th edn, McGraw-Hill Irwin
(ISBN: 9780077736569)

CBA 2014, Annual Reports, 2012/2013 Annual Report, https://www.commbank.com.au/about-

us/shareholders/financial-information/annual-reports.html, viewed 3 October 2014

Chen, X., & Cheung, Y. W. (2011). Renminbi going global. China & World Economy, 19(2), 1-18.

Chu, TH 2005, 'The Chinese RMB: Its Value, Its Peg, and Its Future', Business Economics, 40, 2, pp. 7-17

Chung, Chi-Wah, (2014) People Bank of China, Sydney Branch, Renminbi Internationalisation
Presentation, http://www.cifr.edu.au/assets/document/Chi-wah%20Chung.pdf viewed 17 October 2014

de Meijer, CW 2012, 'And the winner is... London? The location of the second renminbi offshore trading
centre', Journal Of Securities Operations & Custody, 5, 2, pp. 118-133

Edwards, P (2011) HSBC Presentation, RMB Internationalisation seizing the opportunities

http://acbc.com.au/admin/images/uploads/Copy1Aust_China_Bus_Council_RMB_pres_21Sep11v2.pdf
viewed 18 October 2014

Fabbro, D., & Hack, M. (2011). The Effects of Funding Costs and Risk on Banks Lending Rates. Reserve
Bank of Australia Bulletin, 35-41.

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Research Paper A001322735

Fischer, S 1998 Capital-Account Liberalization and the Role of the IMF", Should the IMF Pursue Capital-
Account Convertibility?. Princeton: Princeton University, Essays in International Finance No. 207, (May
1998), 1-10.

Frankel, J. (2011). Historical Precedents for Internationalization of the RMB. In a Council on Foreign
Relations/China Development Research Foundation symposium, The future of the international monetary
system and the role of the renminbi, Beijing (Vol. 1).

Fung, H, Wu, J, & Yau, J 2013, 'Recent Policy Changes Toward the Internationalization of the Renminbi',
Chinese Economy, 46, 4, pp. 6-24,

Fung, H, Tzau, D, & Yau, J 2013, 'Offshore Renminbi-Denominated Bonds', Chinese Economy, 46, 2, pp.
6-28, Business Source Complete, EBSCOhost, viewed 19 October 2014

Greenwood, J 2011, 'The RMB as a Potential International Reserve Currency', International Economy, 25,
4, p. 32

Gyntelberg, Jacob, Guonan Ma, and Eli Remolona. "Developing corporate bond markets in Asia." BIS
Papers 26 (2006): 13-21.

Heritage Bank 2014, Heritage Bank, Financial Information Reports. 2013/2013 Financial Report,
http://www.heritage.com.au/Financial-Information/Reports.aspx, viewed 3 October 2014

Huang, Y (2010). The future of the international currency system and Chinas RMB. In East Asia Forum
(Vol. 28).

IMF 2013, Currency Composition of Official Foreign Exchange Reserves (COFER)

http://www.imf.org/external/np/sta/cofer/eng/glossary.htm#fer viewed 17 October 2014

JPMorgan Chase 2013 Navigate the Rise of the Global RMB, Insights from JPMorgan
www.jpmorgan.com, viewed 18 June 2014

Kenen, P. B. (2011). Currency internationalization: an overview. BIS Papers, 61, 9-18.

Kuijs, L. (2012). Chinas economic growth pattern and strategy. http://www-

wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2010/06/18/000333037_20100618003
219/Rendered/PDF/551040WP0P11751um1term1scenario1eng.pdf

Lee, Ashley. 2014. "Offshore RMB clearing could add transaction risk." International Financial Law
Review 33, no. 6: 65

Lee, J. W. (2014). Will the renminbi emerge as an international reserve currency?. The World Economy,
37(1), 42-62.

Lipman, J 2011, 'Law of Yuan Price: Estimating Equilibrium of the Renminbi', Michigan Journal Of
Business, 4, 2, pp. 61-90

Macquarie 2014, 2013 Annual Report, https://www.macquarie.com.au/mgl/au/about-macquarie-

group/investor-relations/financial-disclosure/financial-reports/macquarie-group-limited-mqg, viewed 3
October 2014

Morningstar 2014, Morningstar Market Index Returns Base Currency - Returns to 28-02-2014,
http://www.morningstar.com.au/s/documents/index-returns-0214.pdf, viewed 3 October 2014

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NAB 2014, NAB 2012/2013 Annual Financial Report, http://www.nab.com.au/about-us/shareholder-

centre/reports-and-presentations/annual-report-results, viewed 3 October 2014

Park, Y, & Song, C 2011, Renminbi Internationalization: Prospects and Implications for Economic
Integration in East Asia, Asian Economic Papers, 10, 3, pp. 42-78

Paul, S, & Kourouche, K 2008, 'Regulatory Policy and the Efficiency of the Banking Sector in Australia',
Australian Economic Review, 41, 3, pp. 260-271

Perkins, D. H., & Rawski, T. G. (2008). Forecasting Chinas economic growth to 2025. Chinas great
economic transformation, 829-86.

Pettit, J., Badakhsh, A., & Klein, M. (2005). Banking The WACC User's Guide.

Plumb, M., Kent, C., & Bishop, J. (2013). Implications for the Australian economy of strong growth in
Asia. Economic Research Department, Reserve Bank of Australia.

Prasad, E, & Lei, Y 2013, The Renminbis Prospects of a Global Reserve Currency, CATO Journal, 33,
3, pp. 563-570,

RBA 2012. June Quarter Bulletin 2012. www.rba.gov.au viewed 29 June 2014.

Rosen, D, & Hanemann, T 2012, 'The Rise in Chinese Overseas Investment and What It Means for
American Businesses', China Business Review, 39, 3, pp. 18-22

Sato, K, Shimizu, J, Shrestha, N, & Zhang, Z 2012, 'New Estimates of the Equilibrium Exchange Rate:
The Case for the Chinese Renminbi', World Economy, 35, 4, pp. 419-443

Saunders, M, Lewis, P & Thornhill, A 2009, Research Methods for Business Students, Prentice Hall,
London

Standard and Poors (2014) Australian Credit Ratings, http://www.standardandpoors.com/en_

AU/web/guest/ratings/entity/-/org-details/sectorCode/FI/entityId/324051 viewed 24 October 2014

Suncorp 2014, Financial Reports 2013/2013, http://www.suncorpgroup.com.au/investors/results-

presentations?term=financial-results, viewed 3 October 2013

Truong, G, Partington, G, & Peat, M 2008, 'Cost-of-Capital Estimation and Capital-Budgeting Practice in
Australia. (cover story)', Australian Journal Of Management (University Of New South Wales), 33, 1, pp.
95-121

Thirlwell, Mark (2011) RBA Discussion Paper, Conference Volume 2011

http://www.rba.gov.au/publications/confs/2011/pdf/huang-wang-disc.pdf viewed 18 October 2014

Walsh, K. D. (2014). RMB Trade Invoicing: Benefits, Impediments and Tipping Points. Impediments and
Tipping Points (May 19, 2014). Viewed 18 October 2014

Westpac Institutional Bank 2014, Daily Rate Sheet. Internal Westpac Communications, viewed 3 October
2014

Wong, P (2014) RMB as Reserve: Rebalancing the Global Financial System, Caixin Online,
http://english.caixin.com/2014-07-24/100708469.html viewed 17 October 2014

26 | P a g e
Research Paper A001322735

Wu, F, Pan, R, & Wang, D 2010, 'The Chinese Renminbi (Yuan)', World Economics, 11, 1, pp. 147-179
Yoonbai, K 2012, 'The Renminbi Debate: A Review of Controversies and New Developments', SERI
Quarterly, 5, 4, pp. 52-5

27 | P a g e
 other research that might currently be in progress. Consequently, the items you read and
write about will enhance your subject knowledge and help you to clarify your research
question(s) further. This process is called critically reviewing the literature.
For most research projects, your literature search will be an early activity. Despite this
Researchearly
Paper start, it is usually necessary to continue searching throughout your projects life. A001322735
The
process can be likened to an upward spiral, culminating in the final draft of a written critical
literature review (Figure 3.1). In the initial stage of your literature review, you will start to
8.0 defineAppendix
the parameters to your research question(s) and objectives (Section 3.4). After gener-
ating key words and conducting your first search (Section 3.5), you will have a list of refer-
ences to authors who have published on these subjects. Once these have been obtained, you
8.1 Method
can readforandLiterature Review
evaluate them (Section 3.6), record the ideas (Section 3.7) and start drafting
your review. After the initial search, you will be able to redefine your parameters more

Written critical review

of the literature

Generate and
refine keywords
Conduct
Redefine
search
parameters

Record
Update and Obtain
revise draft literature
Evaluate

Conduct
Generate and search
refine keywords

Obtain
Record literature
Redefine
parameters

Evaluate

Conduct
Start drafting
search
review

Generate and
refine keywords
Obtain
literature

Figure 3.1 Record

The literature
review process
Source: Mark Define Evaluate
Saunders, Philip parameters
Lewis, Adrian,
Thornhill and
Martin Jenkins Research questions
2003 and objectives

60
Saunders, M, Lewis, P & Thornhill, A 2009

28 | P a g e
Research Paper A001322735

8.2 Current Account Equations

Yoonbai, K 2012

CA = Current Account of Country

NS = National Saving of Country
BD = Budget Deficit
PS = Private Savings
FR = Foreign Reserves
KI = Capital Inflows

8.2.1 International Risk in relation to WACC

Pettit, J., Badakhsh, A., & Klein, M.

29 | P a g e
 Research Paper A001322735

8.3 Dim Sum Bond Yields

an Bankers Association Inc Bank Funding (publishe

Facts and F

Overview of bank funding - RBA

RBA 2012
gust 2012, the RBA showed that domestic deposits accounted for 53% of the fundin
lian banks. Long-term debt (or long-term wholesale funding) accounted for 18% of
g while short-term wholesale funding accounted for 19%. Equity made up 7% of bank fun
8.3.1
ecuritisation Sources of for
accounted Banks Funding
the remaining 2%.

Bank funding distribution

60%

50%
Depo sits
40%
Sh o rt-term d ebt
30%

20% Lo ng -term d ebt

Eq uity
10%
Securitisation
0%
Aug-02

Aug-03

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Source: RBA

er look at RBA
the 2012
data shows that at the start of the global financial crisis, in late 2007, depos
ortion of total bank funding were at a low of 40%. Since then, the proportion of deposits
at a strong rate reaching 53% as at August 2012. Since the GFC, banks have focuse
sing their proportion of funding from deposits which has been reinforced by households
esses building up their savings levels and through deleveraging.
30 | P a g e
RBA Financial Stability Review, September 2012 article Funding Composition of Ban
lia provides some background on changes to banks funding composition since the GFC:
nce the onset of the global financial crisis, there has been a pronounced shift in the fun
mposition of banks in Australia. In particular, there has been a move away from the u
 Research Paper A001322735

8.4 Australian Major Banks WACC

Figures(in($Millions
Value Market*Cap Debt Cost*of*Equity Cost*of*Debt*(Gross) Tax*Rate WACC

NAB **************83,392 **************78,988 ****************4,404 6.079% 5.590% ****************0.300 5.964%

Westpac ************108,454 ************101,206 ****************7,248 6.633% 5.268% ****************0.300 6.436%
CBA ************122,106 ************114,353 ****************7,753 6.448% 5.449% ****************0.300 6.281%
ANZ **************91,116 **************83,568 ****************7,548 6.541% 5.604% ****************0.300 6.324%
Macquarie **************19,379 **************18,379 ****************1,000 6.310% 5.580% ****************0.300 6.186%
Suncorp **************20,072 **************18,270 ****************1,802 6.079% 5.816% ****************0.300 5.899%
Bendigo ****************5,876 ****************5,496 *******************380 5.663% 6.449% ****************0.300 5.589%
Heritage ****************3,613 ****************3,335 *******************278 5.663% 7.467% ****************0.300 5.629%
BOQ ****************4,694 ****************4,394 *******************300 6.541% 6.000% ****************0.300 6.391%
AMP **************16,474 **************16,149 *******************325 10.375% 6.700% ****************0.300 10.263%

Rf Erm Beta Cost*of*Equity

NAB 4.970% 9.590% 0.24 6.079%
Westpac 4.970% 9.590% 0.36 6.633%
CBA 4.970% 9.590% 0.32 6.448%
ANZ 4.970% 9.590% 0.34 6.541%
Macquarie 4.970% 9.590% 0.29 6.310%
Suncorp 4.970% 9.590% 0.24 6.079%
Bendigo 4.970% 9.590% 0.15 5.663%
Heritage* 4.970% 9.590% 0.15 5.663%
BOQ 4.970% 9.590% 0.34 6.541%
AMP 4.970% 9.590% 1.17 10.375%

31 | P a g e
Research Paper A001322735

8.4.1 Australian Major Banks WACC Graphed

WACC$

12.000%$

10.000%$

8.000%$

6.000%$
WACC$

4.000%$

2.000%$

0.000%$
$
B$

c$

Z$

p$

P$
Q$
A$

ie

igo

ge
pa

AN

AM
or
NA

CB

BO
ar

a
nd
nc
t

rit
qu
es

Be
Su

He
ac
W

8.4.2 Australian Major Banks Cost of Debt Graphed

Cost%of%Debt%
8.000%$

7.000%$

6.000%$

5.000%$

4.000%$
Cost$of$Debt$
3.000%$

2.000%$

1.000%$

0.000%$
$
B$

c$

Z$

p$

P$
Q$
A$

ie

igo

ge
pa

AN

AM
or
NA

CB

BO
ar

a
nd
nc
t

rit
qu
es

Be
Su

He
ac
W

32 | P a g e
 Debt Securities
Listed Interest Rate Securities Pricing Sheet +61 2 8253 4584

Westpac - Listed Interest Rate Securities Rate Sheet (02-Oct-2014)

Priced @ T

ISSUE CURRENT PRICING FRANKED UNFRANKED RESET/MATURITY MARGIN COUPON TRADING

Step-up Next
Running Trading Yield to Yield to Swap Rate Years to
Accrued Capital Running Trading Margin Reset / Interest Step-up Payment Coupon Cash Coupon Traded
Security Name ASX Code Size (A$m) Gross Price Franking Yield Margin Maturity Maturity to Reset / Reset / Ex-Date
Interest Price Yield (Cash) (Cash) Maturity Margin Margin Frequency Rate (%) Amount Payment Value ($)
(Grossed) (Grossed) (Grossed) (Cash) Maturity Maturity
Dates Date
Research Paper

CORPORATE BONDS
Fixed
Heritage Bank Subordinated Notes HBSHA 50 $ 101.72 $ 1.81 $ 99.91 0% 10.01% 8.50% 11.20% 2.69% 27-Oct-14 0.1 2.20% Q 10.00% $ 2.49 15-Oct-14 27-Oct-14 0
Heritage Bank Retail Bond HBSHB 228 $ 105.10 $ 0.20 $ 104.90 0% 6.91% 2.44% 5.32% 2.88% 20-Jun-17 2.7 - Q 7.25% $ 1.81 10-Dec-14 22-Dec-14 2,941
Floating
AMP Subordinated Notes 2 AMPHA 325 $ 102.00 $ 0.20 $ 101.80 0% 5.20% 2.17% 5.36% 3.19% 18-Dec-18 4.2 2.65% - Q 5.30% $ 1.32 08-Dec-14 18-Dec-14 505,487
AGL Subordinated Notes AGKHA 650 $ 103.40 $ 0.42 $ 102.98 0% 6.24% 3.06% 6.32% 3.26% 08-Jun-19 4.7 3.80% 0.25% Q 6.43% $ 1.60 26-Nov-14 08-Dec-14 857,271
ANZ Subordinated Notes ANZHA 1,509 $ 103.87 $ 0.15 $ 103.72 0% 5.22% 1.29% 4.17% 2.88% 20-Jun-17 2.7 2.75% - Q 5.41% $ 1.35 10-Dec-14 22-Dec-14 679,882

Westpac Institutional Bank 2014

APA Group Subordinated Notes AQHHA 515 $ 104.99 $ (1.78) $ 106.77 0% 6.75% 2.91% 5.98% 3.08% 31-Mar-18 3.5 4.50% - Q 7.21% $ 3.63 18-Sep-14 31-Dec-14 116,961
Australian Unity Notes AYUHA 120 $ 102.50 $ (0.20) $ 102.70 0% 6.04% 1.85% 4.59% 2.75% 14-Apr-16 1.5 3.55% - Q 6.21% $ 1.56 01-Oct-14 14-Oct-14 0
Bentham IMF Bonds IMFHA 50 $ 103.40 $ (0.11) $ 103.51 0% 6.61% 3.35% 6.63% 3.27% 30-Jun-19 4.7 4.20% - Q 6.84% $ 1.72 25-Sep-14 08-Oct-14 155,041
Caltex Subordinated Notes CTXHA 550 $ 106.25 $ 0.33 $ 105.92 0% 6.75% 2.32% 5.23% 2.91% 15-Sep-17 3.0 4.50% - Q 7.15% $ 1.78 03-Dec-14 15-Dec-14 640,674
CBA Retail Bond CBAHA 570 $ 100.00 $ (0.13) $ 100.13 0% 3.71% 1.04% 3.77% 2.72% 24-Dec-15 1.2 1.05% - Q 3.72% $ 0.94 02-Oct-14 15-Oct-14 785,303
Colonial Group Subordinated Notes CNGHA 1,000 $ 101.95 $ (1.47) $ 103.42 0% 5.76% 2.41% 5.27% 2.85% 31-Mar-17 2.5 3.25% - Q 5.96% $ 3.00 18-Sep-14 31-Dec-14 1,394,334
Crown Subordinated Notes CWNHA 532 $ 105.25 $ 0.36 $ 104.89 0% 7.29% 3.57% 6.73% 3.15% 14-Sep-18 4.0 5.00% - Q 7.65% $ 1.91 03-Dec-14 15-Dec-14 1,019,971
MYOB Subordinated Notes MYBG 155 $ 103.90 $ 0.26 $ 103.64 0% 9.03% 5.39% 8.43% 3.04% 20-Dec-17 3.2 6.70% - Q 9.36% $ 2.33 10-Dec-14 22-Dec-14 20,708
NAB Subordinated Notes NABHB 1,173 $ 103.70 $ 0.21 $ 103.49 0% 5.21% 1.37% 4.25% 2.88% 19-Jun-17 2.7 2.75% - Q 5.40% $ 1.35 08-Dec-14 18-Dec-14 732,541
Origin Subordinated Notes ORGHA 900 $ 101.80 $ 0.18 $ 101.62 0% 6.56% 3.21% 6.04% 2.82% 22-Dec-16 2.2 4.00% 1.00% Q 6.66% $ 1.66 10-Dec-14 22-Dec-14 405,939
Primary Bonds PRYHA 152 $ 101.35 $ 1.73 $ 99.62 0% 6.73% 2.65% 5.37% 2.72% 28-Sep-15 1.0 4.00% - Q 6.71% $ 3.36 16-Dec-14 30-Dec-14 34,614
Suncorp Subordinated Notes SUNPD 770 $ 103.30 $ 0.62 $ 102.68 0% 5.34% 2.12% 5.30% 3.18% 22-Nov-18 4.1 2.85% - Q 5.49% $ 1.41 12-Nov-14 24-Nov-14 1,564,164
Tabcorp Subordinated Notes TAHHB 250 $ 104.00 $ 0.18 $ 103.82 0% 6.42% 2.34% 5.19% 2.85% 22-Mar-17 2.5 4.00% 0.25% Q 6.66% $ 1.66 10-Dec-14 22-Dec-14 213,178
Tatts Group Ltd TTSHA 195 $ 104.80 $ (0.08) $ 104.88 0% 5.50% 1.96% 5.23% 3.27% 05-Jul-19 4.8 3.10% - Q 5.77% $ 1.45 25-Sep-14 07-Oct-14 0
Westpac Subordinated Notes WBCHA 1,676 $ 104.10 $ 0.56 $ 103.54 0% 5.20% 1.44% 4.34% 2.90% 23-Aug-17 2.9 2.75% - Q 5.39% $ 1.33 12-Nov-14 23-Nov-14 2,335,872
Westpac Subordinated Notes II WBCHB 925 $ 101.60 $ 0.55 $ 101.05 0% 4.88% 2.00% 5.14% 3.14% 22-Aug-18 3.9 2.30% - Q 4.94% $ 1.24 12-Nov-14 22-Nov-14 716,771
WOW Notes II WOWHC 700 $ 104.00 $ 0.61 $ 103.39 0% 5.69% 1.58% 4.40% 2.82% 24-Nov-16 2.1 3.25% 1.00% Q 5.89% $ 1.47 12-Nov-14 24-Nov-14 161,367
Perpetuals
Bendigo/Adelaide Bank Notes BENHB 21 $ 79.25 $ 0.31 $ 78.94 0% 4.59% 2.45% 6.76% 4.32% Perpetual 1.00% - Q 3.62% $ 0.91 13-Nov-14 02-Dec-14 0
Macquarie Bank Income Securities MBLHB 400 $ 81.75 $ (0.16) $ 81.90 0% 5.33% 3.08% 7.39% 4.32% Perpetual 1.70% - Q 4.37% $ 1.10 25-Sep-14 15-Oct-14 75,614
NAB Income Securities NABHA 2,000 $ 79.50 $ 0.51 $ 78.99 0% 4.92% 2.73% 7.05% 4.32% Perpetual 1.25% - Q 3.89% $ 1.00 28-Oct-14 17-Nov-14 1,398,830
Suncorp-Metway SBKHB 72 $ 79.00 $ 0.29 $ 78.71 0% 4.28% 2.16% 6.48% 4.32% Perpetual 0.75% - Q 3.37% $ 0.85 13-Nov-14 02-Dec-14 0

HYBRIDS
Convertible Notes
Australian Foundation Investment Company AFIG 204 $ 115.00 $ 3.70 $ 111.30 0% 5.62% 0.24% 0.24% 2.84% 28-Feb-17 2.4 - S 6.25% $ 6.25 14-Feb-15 28-Feb-15 460
Peet Limited PPCG 50 $ 105.60 $ 2.81 $ 102.79 0% 9.24% 7.70% 7.70% 2.76% 16-Jun-16 1.7 - S 9.50% $ 4.76 04-Dec-14 16-Dec-14 31,680
Mandatory Convertibles
ANZ CPS2 ANZPA 1,969 $ 101.00 $ 0.19 $ 100.81 100% 5.70% 2.74% 5.56% 3.99% 1.07% 3.89% 2.82% 15-Dec-16 2.2 3.10% - Q 5.75% $ 1.00 26-Nov-14 15-Dec-14 1,153,353
ANZ Capital Notes ANZPD 1,120 $ 99.00 $ 0.36 $ 98.64 100% 6.12% 3.67% 7.23% 4.29% 1.50% 5.06% 3.56% 01-Sep-21 6.9 3.40% - S 6.04% $ 2.11 18-Feb-15 02-Mar-15 1,317,682
ANZ Capital Notes 2 ANZPE 1,610 $ 98.95 $ 0.09 $ 98.86 100% 6.07% 3.46% 7.07% 4.25% 1.33% 4.95% 3.61% 24-Mar-22 7.5 3.25% - S 6.01% $ 2.08 12-Mar-15 24-Mar-15 920,610
ANZ CPS3 ANZPC 1,340 $ 99.45 $ 0.34 $ 99.11 100% 5.79% 3.48% 6.39% 4.05% 1.57% 4.47% 2.91% 01-Sep-17 2.9 3.10% - S 5.74% $ 2.00 11-Feb-15 02-Mar-15 1,301,306
Bank of Queensland CPS BOQPD 300 $ 103.20 $ (0.20) $ 103.40 100% 7.57% 4.06% 7.14% 5.30% 1.91% 5.00% 3.08% 15-Apr-18 3.5 5.10% - S 7.83% $ 2.75 25-Sep-14 15-Oct-14 122,962
Bendigo/Adelaide Bank CPS BENPD 269 $ 104.53 $ 1.64 $ 102.89 100% 7.50% 4.21% 7.25% 5.25% 2.04% 5.07% 3.03% 13-Dec-17 3.2 5.00% - S 7.72% $ 2.74 26-Nov-14 15-Dec-14 299,046
CBA PERLS V CBAPA 2,000 $ 199.81 $ 1.46 $ 198.35 100% 3.05% 17.72% 20.42% 2.14% 11.60% 14.29% 2.69% 31-Oct-14 0.1 3.40% - Q 6.06% $ 2.14 21-Oct-14 31-Oct-14 26,393
CBA PERLS VI CBAPC 2,000 $ 101.74 $ (0.91) $ 102.65 100% 6.28% 3.32% 6.51% 4.40% 1.37% 4.56% 3.19% 15-Dec-18 4.2 3.80% - Q 6.45% $ 1.13 03-Sep-14 15-Dec-14 1,772,814
CBA PERLS VII CBAPD 2,600 $ 97.10 $ 0.01 $ 97.09 100% 5.66% 3.31% 6.99% 3.96% 1.21% 4.89% 3.68% 15-Dec-22 8.2 2.80% - Q 5.50% $ 0.79 03-Dec-14 15-Dec-14 11,246,469
8.4.3 Data used for cost of debt for Banks used in this research paper

Insurance Aust Group CPS IAGPC 377 $ 104.42 $ 1.98 $ 102.44 100% 6.55% 3.32% 6.18% 4.59% 1.47% 4.33% 2.86% 01-May-17 2.6 4.00% - S 6.71% $ 2.39 22-Oct-14 03-Nov-14 210,907
Macquarie Group Capital Notes MQGPA 600 $ 100.89 $ 1.45 $ 99.44 40% 6.65% 4.35% 7.46% 1.86% -1.02% 2.09% 3.11% 07-Jun-18 3.7 4.00% - S 6.62% $ 2.30 25-Nov-14 08-Dec-14 1,182,031
NAB CPS NABPA 1,514 $ 98.60 $ 0.11 $ 98.49 100% 5.95% 3.60% 6.83% 4.17% 1.55% 4.78% 3.23% 20-Mar-19 4.5 3.20% - Q 5.86% $ 1.02 03-Dec-14 22-Dec-14 2,688,188
NAB CPS II NABPB 1,717 $ 98.36 $ 0.17 $ 98.19 100% 6.00% 3.62% 7.09% 4.20% 1.49% 4.97% 3.47% 17-Dec-20 6.2 3.25% - Q 5.89% $ 1.03 28-Nov-14 17-Dec-14 1,373,902
Suncorp CPS2 SUNPC 560 $ 103.48 $ 0.21 $ 103.27 100% 7.06% 3.53% 6.57% 4.94% 1.56% 4.60% 3.04% 17-Dec-17 3.2 4.65% - Q 7.29% $ 1.27 08-Dec-14 17-Dec-14 348,367
Suncorp CPS3 SUNPE 400 $ 98.70 $ 0.17 $ 98.53 100% 6.13% 3.73% 7.13% 4.29% 1.59% 4.99% 3.41% 17-Jun-20 5.7 3.40% - Q 6.04% $ 1.05 01-Dec-14 17-Dec-14 1,068,083
Westpac Capital Notes WBCPD 1,384 $ 98.70 $ 1.30 $ 97.40 0% 5.99% 3.64% 6.86% 3.22% 08-Mar-19 4.4 3.20% - Q 5.83% $ 2.05 26-Nov-14 08-Dec-14 1,073,017
Westpac Capital Notes 2 WBCPE 1,311 $ 98.00 $ 0.10 $ 97.90 0% 5.84% 3.40% 7.01% 3.61% 23-Sep-22 8.0 3.05% - Q 5.72% $ 1.00 11-Dec-14 23-Dec-14 1,247,772
Westpac CPS WBCPC 1,189 $ 99.47 $ 2.12 $ 97.35 100% 6.14% 3.43% 6.51% 4.30% 1.48% 4.56% 3.08% 31-Mar-18 3.5 3.25% - S 5.98% $ 4.19 17-Mar-15 31-Mar-15 1,348,001
Reset-Preference Shares
Insurance Aust Group Reset Prefs IANG 550 $ 102.96 $ 0.22 $ 102.74 100% 6.47% 3.38% 6.72% 4.53% 1.37% 4.71% 3.34% 16-Dec-19 5.2 4.00% 1.00% Q 6.65% $ 1.16 03-Dec-14 15-Dec-14 416,226
Step-up Preference Shares
Adelaide SPS BENPC 100 $ 100.33 $ (0.07) $ 100.40 100% 4.40% -13.20% -10.51% 3.08% -10.05% -7.36% 2.69% 10-Oct-14 0.0 1.75% 1.00% Q 4.42% $ 0.78 22-Sep-14 10-Oct-14 0
Bendigo/Adelaide Bank BPS BENPB 90 $ 98.10 $ 0.14 $ 97.96 100% 4.23% 4.56% 7.26% 2.96% 2.38% 5.09% 2.70% 15-Jun-15 0.7 1.50% 1.00% Q 4.15% $ 0.72 20-Nov-14 15-Dec-14 52,778
CBA PERLS III PCAPA 583 $ 193.30 $ (0.07) $ 193.37 100% 1.92% 3.38% 6.13% 1.35% 1.55% 4.29% 2.74% 06-Apr-16 1.5 1.05% 1.00% Q 3.72% $ 1.31 26-Sep-14 07-Oct-14 900,368
Goodman PLUS GMPPA 327 $ 102.00 $ 1.70 $ 100.30 0% 6.59% 3.22% 6.27% 3.04% 31-Dec-17 3.2 3.90% 0.25% Q 6.61% $ 3.33 16-Dec-14 31-Dec-14 122,160
Westpac TPS WCTPA 763 $ 96.40 $ 0.67 $ 95.73 100% 3.87% 3.20% 5.97% 2.71% 1.41% 4.18% 2.77% 30-Jun-16 1.7 1.00% 1.00% Q 3.71% $ 1.31 06-Dec-14 31-Dec-14 746,121

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Stepped up Preference Shares

Multiplex SITES MXUPA 450 $ 85.00 $ (0.25) $ 85.25 0% 7.70% 5.36% 9.67% 4.32% Perpetual 3.90% - Q 6.57% $ 1.67 26-Sep-14 16-Oct-14 384,550
Ramsay CARES RHCPA 260 $ 103.30 $ (0.26) $ 103.56 100% 7.32% 4.55% 8.87% 5.13% 1.89% 6.21% 4.32% Perpetual 4.85% - S 7.59% $ 2.63 01-Oct-14 20-Oct-14 124,695
Seven Telys 4 SVWPA 496 $ 87.26 $ 1.72 $ 85.54 100% 8.58% 6.06% 10.38% 6.00% 2.95% 7.27% 4.32% Perpetual 4.75% - S 7.34% $ 2.56 10-Nov-14 01-Dec-14 132,363
Research Paper A001322735

8.5 Survey Questions used for Qualitative Research

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8.6 Survey Results

8.6.1 Statements on RMB

Please evaluate the following statements about the Renminbi

The integration of the RMB with world currencies will have a

positive impact for your business

Your business is taking specific steps or actions in answer to

the liberilisation and integration of the RMB

Your business will be affected if the RMB was to become a

global reserve currency

The RMB will become the dominant global reserve currency in

the next 10 years

2.80 3.00 3.20 3.40 3.60

n=67

8.6.2 Opinions on the future of the RMB

Please answer the following questions in regards to your Business

14
12 No Change / Not Applicable
10
Minimal
8
Moderate
6
Large Amount
4
2 Unknown

0
business's invoicing due to the

In the next 5 years, what is the

business's expenses due to the

In the next 5 years, what is the

In the next 5 years, what is the

In the next 5 years, what is the

business's funding due to the

business's risk management

expected change to your

expected change to your

expected change to your

expected change to your

due to the RMB?

RMB?
RMB?

RMB?

n=67

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8.7 China Trade and GDP compared to Financial Integration

Ardelean, R. D., & Zhang, M. (2014)

8.8 Market Risk Premium over Long Term Bonds

Pettit, Badakhsh & Klein (2005)

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8.9 Offshore Bond Issuance by Australian Banks

RBA 2012

8.9.1 Chinese Yuan and USD Exchange Rate

RBA 2012

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8.10 Australian Banks Credit Ratings

STANDARD & POORS CREDIT RATINGS OF AUSTRALIAN BANKS

NAB AA- STABLE

Westpac AA- STABLE
CBA AA- STABLE
ANZ AA- STABLE
Macquarie A STABLE
Suncorp A+ STABLE
Bendigo A- STABLE
Heritage BBB+ STABLE *(Fitch Ratings)
BOQ A- STABLE
AMP A+ STABLE

Standard and Poors (2014)

*Heritage Bank in 2012 decided to withdraw the authoristation for Standard and Poors to
provide a credit rating on the institution, with CEO John Minz stating, that with the nature of our
funding program, maintaining the S&P credit rating was no longer necessary (ASX Media
Release 2014) Therefore the rating was obtained by the same media release as there has been no
changes to Fitchs rating on Heritage Bank since 2012.

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8.11 Expected Rise of RMB FX Trading

Edwards, P (2011)

8.12 Percent of Currency as total FX Reserve

IMF 2013

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8.13 Types of Issuance in Corporate Bond Markets

Gyntelberg, Jacob, Guonan Ma, and Eli Remolona

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8.14 Trades between China/Australia

Frankel, J. (2011)

8.15 Trades between China/Australia

RBA 2012

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8.16 RMBPayments
Top 10 regions for RMB Usage Outside Mainland China
Western developed countries are increasingly involved in RMB businesses. New offshore
RMB centers will emerge and each will have its own niche and strength.
Top 10 Regions RMB Payment (billion USD)

2H2013 2H2012 YoY

Region
Rank Value % Rank Value % Growth
Hong Kong 1 20,592 78.6% 1 8,244 85.1% 150%
UK 2 1,473 5.6% 3 370 3.8% 298%
Singapore 3 1,038 4.0% 2 379 3.9% 174%
Taiwan 4 620 2.4% 10 39 0.4% 1470%
France 5 473 1.8% 5 94 1.0% 406%
US 6 467 1.8% 4 105 1.1% 344%
Australia 7 287 1.1% 11 37 0.4% 667%
Luxembourg 8 201 0.8% 6 71 0.7% 183%
Germany 9 194 0.7% 7 56 0.6% 249%
South Korea 10 113 0.4% 18 10 0.1% 1073%
Total 26,201* 100% 9,682* 100% 171%
Chung, Chi-Wah, (2014)
*Note: SWIFT recorded both sides of an transaction. To adjust the value to equate to the same reporting convention used by
BIS, the total value should be divided by two. Source: SWIFT

8.17 Net Offshore Purchases of Australian Bank Debt

RBA 2012

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8.18 Global versus Chinese outward FDI

Rosen, D, & Hanemann, T 2012

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8.19 RMB Timeframe

Westpac Institutional Bank 2014 (Nathalie Antoine)

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8.19.1 RMB Rising of Dim Sum Bonds

Westpac Institutional Bank 2014 (Nathalie Antoine)

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8.19.2 RMB Rising of Dim Sum Bonds

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