Reserve Bank of Australia Bulletin
August 2001
Box A: Composition of Capital Flows in 2000
This Box summarises recent data on
capital flows into and out of Australia.
Capital flows can be disaggregated in
various ways. Graph A1 breaks the flows
down into three main types: equity flows;
bond flows (mainly government bonds); and
flows channelled through the banking system
and money market. For each category the
flows are shown in net terms – i.e. the
difference between inflows and outflows. The
data are also smoothed to some extent by
showing four quarter moving totals.
The main points that can be observed from
the graph are as follows:
Graph A1
Net Capital Flows
Moving annual total
A$b
A$b
Net foreign equity
30
30
20
20
10
10
0
0
A$b
A$b
Net bonds
30
30
20
20
10
10
0
0
A$b
A$b
Banks and money market
30
30
20
20
10
10
0
0
-10
-10
1990
1992
1994
1996
1998
2000
•
net equity flows fell away sharply during
2000 after being quite strong through
1998 and 1999;
• bond flows have been negative since
1997. This is the period when bond yield
differentials relative to the US narrowed
very sharply; and
• inflows through banks and the money
market have increased strongly. These
flows incorporate overseas borrowings by
banks, which are on-lent to Australian
households and businesses, as well as
purchases of Australian corporate
short-term debt by foreigners. It is
important to note that the foreign
borrowings by banks are either directly
in Australian dollars or hedged back to
Australian dollars. Banks use foreign
borrowings as a way of diversifying their
funding base, not to take on currency risk.
Equity flows can be disaggregated further,
into direct investment (i.e. investment in
Australian companies by overseas
companies) and portfolio investment
(essentially investment through share
markets by funds managers and other
institutions). This disaggregation is shown
in Graph A2, and highlights that the decline
of equity inflows into Australia last year was
almost entirely due to swings in portfolio
equity. Net direct investment has remained
strong – i.e. overseas companies are
continuing to find attractive investment
opportunities in Australia.
Net portfolio equity flows can, in turn, be
disaggregated further, into investment by
foreigners into Australian shares and
investment by Australians into foreign shares
(Graph A3).This shows that the net outflows
of portfolio equity investment in 2000
occurred because foreigners stopped
investing into Australian shares (and in fact
reduced their holdings of shares) while
Australians increased their purchases of
foreign shares.
19
August 2001
Statement on Monetary Policy
Graph A2
Net Equity Flows
Moving annual total
A$b
A$b
Net direct investment
10
10
5
5
0
0
-5
-5
A$b
A$b
Net portfolio equity
15
15
10
10
5
5
0
0
-5
-5
These changes in the composition of
capital flows have been reflected in the
outstanding claims that foreigners have on
Australia. As a proportion of GDP, net
foreign liabilities have not changed much
over recent years, at around 55 per cent, but
there has been a shift away from equity to
debt over the past couple of years
(Graph A4).
The currency composition of Australia’s
foreign assets and liabilities can be seen in
Graph A5. It shows that Australia’s net
foreign liabilities are not reflected in a foreign
currency exposure. Australia has more
foreign-currency assets than liabilities, as
most liabilities to foreigners are in Australian
dollars. R
Graph A4
Net Foreign Liabilities
Per cent of GDP, moving annual total
Index
Index
-10
-10
1990
1992
1994
1996
1998
2000
60
60
Total
50
50
Graph A3
40
40
Debt
Gross Portfolio Equity Flows
30
30
Moving annual total
A$b
A$b
Foreign investment in Australia
20
20
15
15
10
10
Equity
10
10
0
0
1991
5
5
0
0
1993
1995
1997
1999
2001
Graph A5
Australia’s External Position
Per cent of GDP
A$b
A$b
Australian investment abroad
%
15
15
10
10
5
5
0
0
-5
-5
1991
1993
1995
1997
1999
2001
Gross foreign liabilities
Gross foreign assets
120
120
■ Australian dollar
■ Foreign currency
100
100
80
80
60
60
40
40
20
20
0
0
1997
20
%
1998
1999 2000 1997
1998
1999 2000