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Trade between
Asia's two largest economies is about to get a
whole lot easier.
China's central bank confirmed Tuesday that the
country will allow the direct trading of its currency against the
Japanese yen starting Friday.
This makes the yen the first major currency besides the
US dollar
that can be directly traded with the RMB. The move is part of efforts
made by China and
Japan to strengthen cooperation in trade and financial
markets. And it’s a huge step forward for the internationalization of
the yuan.
After some excitement in the Asian markets yesterday. The
People’s
Bank of China confirmed on Tuesday that China and Japan will start to
directly trade their currencies in Shanghai and Tokyo from June 1. The
move will shore up trade and financial ties between Asia’s two biggest
economies, and also marks another step to raise the yuan’s international
role.
Japanese Finance Minister
Jun Azumi, who announced the decision in Tokyo, stressed the cost benefits behind the move.
Azumi said, "By conducting transactions without using a third
country’s currency, it will bring merits of reducing transaction costs
and lowering risks involved in settlements at financial institutions. It
will also contribute to improving convenience of both countries’
currencies and reinvigorate the Tokyo market."
The step eliminates the US dollar’s monopoly position to set the
exchange rate between the two currencies, and follows a deal struck by
the leaders of the two countries in December.
Experts say it’s an important move towards the internationalization of China’s yuan currency.
Professor Ding Zhijie, dean of School of Banking & Finance, UIBE,
said, "It raises the convertibility of the yuan. And I believe the yuan
trading will be accepted by more Asian economies as well as the
international markets. It will also push forward the
internationalization of the yuan."
Several banks in the two countries, including
Bank of Tokyo-Mitsubishi UFJ and
Bank of China, will start the direct trading.
Huang Jiaying, trade with Bank of China said, "The move will likely
make the yuan accepted by more Japanese investors as well. It will also
help boost the possibility of the yuan becoming an
internationally-settled currency, which is an important move of
propelling the yuan to become an international reserve currency."
And Japan, which in March pledged to buy about 10 billion US dollars
of Chinese government debt, is the first economy to connect with China’s
yuan. The move is likely to strengthen ties with its biggest
trading partner.
Japan, China to shore up yen/yuan trade
Japan and China will start trading their
currencies directly in Tokyo and Shanghai from June 1 in a move that
shores up trade and financial ties between Asia's two biggest economies
and also marks another baby step to raise the yuan's international role.
The step eliminates the use of the dollar to set the exchange rate
and follows an agreement struck by the leaders of the two countries in
December, which also involves Japan buying Chinese government debt and
efforts to forge a free trade pact between China, Japan and South Korea.
"This is part of China's broader strategy to reduce dependence on the
dollar. The yen has been chosen because of large trade flows between
the two countries," said Dariusz Kowalczyk, senior economist and
strategist at
Credit Agricole CIB in Hong Kong.
"Volumes of currency trading on shore are small, but this could lead
to an expansion of trading with other currencies. It would be easier for
China to expand into other Asian currencies."
Japanese Finance Minister Jun Azumi, who announced the decision in Tokyo, stressed the cost benefits of the move.
"By conducting transactions without using the third country's
currency, it will bring merits of reducing transaction costs and
lowering risks involved in settlements at financial institutions," Azumi
told reporters after a cabinet meeting.
The People's Bank of China noted benefits for mutual trade, but also
tied the decision to China's drive to boost the use of the yuan as a
settlement currency for trade and financial transactions.
"Developing the direct yuan/yen trading will help form the direct
yuan/yen exchange rate and reduce the trading cost for entities and
promote the use of the yuan and yen in bilateral trade and investment as
well as help strengthen financial cooperation between the two
countries," it said in a statement.
A separate statement issued by the China Foreign Exchange Trade
System said it will provide a market-making system for direct yuan/yen
trading.
Until now yen-yuan rates were calculated on the basis of their
respective rates against the dollar, so the move is expected to narrow
trading spreads, lower transaction costs and allow more trade deals to
be settled directly.
For Japan, which in March pledged to buy about $10 billion of Chinese
government debt, becoming the first major economy to do so, the move
could strengthen ties with its biggest trading partner.
Despite sometimes rancorous political ties between the two
neighbours, Japan's economic fortunes are increasingly tied to China's
economic growth and consumer demand.
Dealers in Shanghai said the near-term effect would be probably higher trading volumes and lower costs.
"Direct yuan-yen trading is likely to cut trading costs, boosting
yuan-yen trading liquidity," said a dealer at a foreign bank. "Most yuan
trading against the yen now goes through the dollar, because traders
refer to dollar-yuan value to price yen-yuan."
But some played down the broader impact.
"From what I can see, it doesn't actually include any opening up of
the capital account at all. It just allows a direct cross to be traded
rather than actually increasing the amount of flow that can happen
onshore to offshore," Dominic Bunning, currency strategist at HSCB in
Hong Kong, said.
"It seems to be more of a technical issue rather than a major development."
The move to facilitate yen-yuan trading and the debt deal are part of
Beijing's long-term efforts to elevate the yuan's status as an
international currency, which so far have mainly centred on China's
promotion of the yuan to settle trade.
Beijing has struck agreements with several nations from Malaysia to
Belarus and Argentina on the use of the yuan in trade and other
transactions. It has expanded a pilot programme started in 2009 into a
nationwide one allowing firms to settle their trade in yuan.
The result has been a relative surge in the use of the currency. More
than 9%of China's total trade was settled in yuan in 2011, up from just
0.7% in 2010.
Few argue against the idea that the yuan will one day become a
reserve currency, given World Bank predictions that China will overtake
the United States as the world's top economy before 2030. But to achieve
that the yuan would need to become fully convertible and Beijing has
yet to indicate any timetable for reaching that stage.- Reuters
