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Foreign Exchange

China and Japan to begin trading their currencies directly

China and Japan have announced plans to start trading the renminbi against the yen directly, as Beijing continues its push to internationalize its currency.

The two currencies are set to start trading against each other on June 1 initially via brokers in Tokyo and through an expanded panel of market makers in the onshore China Foreign Exchange Trade System in Shanghai. The move will eliminate the use of the dollar in the transactions and comes as part of an effort to strengthen trade links between Asia’s two largest economies.

It follows an agreement between the countries’ leaders in December, which saw Japan buying Chinese government debt, and a commitment made to try to create a free trade pact between China, Japan and South Korea.

Derek Halpenny, head of FX strategy at Bank of Tokyo-Mitsubishi UFJ, says it remained to be seen whether trading volumes took off in the currency pair, although it demonstrated Beijing’s ambitions for the renminbi.

“This is more evidence of China trying to internationalize the renminbi,” he says. “From a trade point of view, it does make sense since trade flows between the two countries are huge and have been growing markedly since the financial crisis.”

Indeed, trade volumes between Japan and China stand just under $350 billion annually.

Japan-China total merchandise trade 

 Source: CEIC

  Jun Azumi, Japan’s finance minister, announced the decision in Tokyo on Tuesday, saying that bypassing the dollar would reduce dealing costs.

“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,” he says.

Azumi says talks on improving yen-renminbi trading further would continue.

The People’s Bank of China (PBoC), while noting the benefits of reduced transaction costs, also pointed to the efforts to broaden the use of the renminbi.

“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,” the central bank says in a statement.

For China, the deal represents another step towards the wider use of the renminbi, as it continues a gradual push to reduce its reliance on the dollar and moves towards the eventual convertibility of its currency.

So far, those efforts have been mainly focused on encouraging the use of the currency for trade settlement.

Those efforts have seen China sign a series of swap deals with other central banks to provide seed money for renminbi settlement.

Since 2008, the PBoC has implemented swap deals with Japan, South Korea, Australia, Malaysia, Kazakhstan and the UAE, as well as struggling countries such as Iceland and Belarus.

HSBC reckons that $2 trillion of Chinese trade will be settled in RMB by 2015, pushing it into the world’s top-three trading currencies.

The latest figures from Swift show that RMB is now the 16th most-used global payment currency, though it is rocketing up the rankings and is the third biggest currency in trade finance.

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