Asia Times Online :: Japan, China bypass US in currency trade
Japan and China on Friday started direct trading between the yen and the yuan in Tokyo and Shanghai, by-passing the need first to exchange either currency into the US dollar. The move should strengthen bilateral trade between the two economies while marking an important step in the internationalization of the yuan. - Kosuke Takahashi (Jun 1, '12)
Japan, China bypass US in currency
tradeBy 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
- began 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. 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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