Japan, China bypass US in currency
trade By Kosuke Takahashi
TOKYO - Japan and China started direct
trading of their currencies, the yen and the yuan,
on the inter-bank foreign exchange markets in
Tokyo and Shanghai on Friday in an apparent bid to
strengthen bilateral trade and investment between
the world's second- and third-largest economies.
Direct yen-yuan trades also aim to hedge
the risk of the dollar's fall in the long run as
the world's key settlement currency and as the
main reserve currency in Asia, the world's
economic growth center in the 21st century. By
skipping the dollar in transactions, the region's
two biggest economies intend to reduce their
dependence on dollar risk and US monetary
authorities' influence on the Asian economy -
aiding China's goal of undercutting US influence
in the region.
It is the first time that
China has allowed a major currency other
than the dollar to
directly trade with the yuan. For Beijing, this
new step brings benefits of further
internationalization of the yuan. For Tokyo, the
possible future correction of China's still
artificially undervalued yuan may bring the plus
of a weaker yen, boosting profits of Japanese
exporters such as Toyota and Sony in the long run.
Japan's three megabanks - Mitsubishi UFJ
Financial Group, Sumitomo Mitsui Financial Group
and Mizuho Financial Group - will begin direct
yen-yuan trades with major Chinese banks on
Friday. Exchange rates between the yen and the
yuan will be determined by their transactions,
delinking the current "cross rate" system in which
the US dollar intermediates in setting yen-yuan
rates.
"We can lower transaction costs and
reduce settlement risks at financial institutions
as well as making both nations' currencies more
useful and energizing the Tokyo market," Japan's
Finance Minister Jun Azumi said on May 29.
China welcomed the new trading agreement
with much fanfare.
"This will help lower
currency conversion costs for economic entities,
facilitate the use of RMB [the renminbi, as the
Chinese currency is also referred to] and Japanese
yen in bilateral trade and investment, promote
financial cooperation and enhance economic and
financial ties between the two countries," the
People's Bank of China (central bank) said in a
statement.
Skipping the
dollar Up until Friday, Japanese and
Chinese firms had paid currency conversion fees
twice. For Japanese companies, they first had to
convert the yen into the dollar, then they
exchanged the dollar for the Chinese currency. For
Chinese firms, it was vice versa. With this
removal of the interim step by skipping the dollar
in transactions, many expect cost reductions.
Japan ranks fourth among China's trading
partners after the European Union, the United
States and the 10-country Association of Southeast
Asian Nations (ASEAN), while China has been
Japan's largest trading partner for the past three
years.
Bilateral trade rose 14.3%
year-on-year to reach US$344.9 billion in 2011.
For Japan, China accounts for about 20% of its
world trade value. Around 50% to 60% of that is
being settled in dollars, with less than 1% of it
settled in yuan. One Chinese news outlet has
estimated direct yen-yuan transactions will
realize $3 billion in cost savings.
There
are still cautious views on the scale of cost
reductions among Japanese market participants.
"Dollar-yen transaction costs are already
very low," Daisuke Karakama, market economist at
Mizuho Corporate Bank in Tokyo, said on Thursday.
"The cost reduction effect of direct yen-yuan
trading should be limited."
Internationalization of the
yuan For China, this new trading is a step
in its moves to internationalize the yuan,
accelerating the currency's wider use. More than
9% of China's total trade was settled in yuan last
year, up from only 0.7% in 2010, according to
Xinhuanet.
Yuan-denominated trade between
the mainland China and Hong Kong started in July
2009, as Beijing allowed companies in Shanghai and
four cities in the southern province of Guangdong
to use yuan in trade with Hong Kong, Macau and
members of ASEAN. [1] In July 2010, China also
allowed the yuan to be more freely traded and
transferred in Hong Kong, establishing an offshore
yuan market for the first time.
But many
experts such as Mizuho's Karakama believe China
will soon face a trilemma in its economic policy.
An economy cannot combine at the same time
a non-floating dollar peg currency, free capital
mobility and autonomy in its monetary policy.
Developed nations such as Japan and South Korea
abandoned a dollar peg system in order to secure
international inflows of money and discretionary
monetary policies. (In contrast, countries using
the euro abandoned individual monetary policy by
consolidating their financial policy instruments
to the European Central Bank.)
In April,
the People's Bank of China announced it would
widen the yuan's daily trading limit against the
dollar to 1% from 0.5%.
"With the
internationalization of the yuan, it will become
more and more difficult for China to control the
yuan," Karakama said.
Should China shift
to a limited floating exchange rate system, the
yuan will likely appreciate against major
currencies such as the dollar. With Japan's
business with China expanding and the presence of
the yuan increasing in Japan's international
trade, this will push down the yen's effective
exchange rate against major currencies. Annual
trade between China and Japan more than doubled in
the past 10 years.
Kosuke Takahashi
is a Tokyo-based Japanese journalist. His
twitter is @TakahashiKosuke
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