China, Japan Reach Major Currency and Debt Deal

December 27, 2011 01:57 AM
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via a special arrangement with Informa Economics, Inc.

Mixed views on impacts

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

China and Japan inked a major currency and debt deal although there are mixed views on exactly what and how big the impacts will be.

Heading into the visit to China by Japanese Prime Minister Yoshihiko Noda, both sides were signaling a currency and debt deal would be in the offing. Their weekend announcement confirmed this development, with the agreements allowing direct trade in yuan/yen between the two sides. Currently, they convert their currencies into US dollars when it comes to trade between the two sides.

The bond deal was also of note, as Japan will now purchase Chinese bonds.

Both sides hailed the deals as ones to help reduce costs and risks for their companies. But the impact and extent of the effort will still take time to determine. “To support the growing economic and financial ties between China and Japan, the leaders of China and Japan have agreed to enhance mutual cooperation in financial markets of both countries and encourage financial transactions between the two countries,” the countries said.

First, details have to be worked out. Like any deal at a political level, the effort now shifts to making the agreement work and putting it in place. That will take a so-far unspecified amount of time.

Others point out that this direct trade had already been possible since the middle of 2010. But so far, it has not really caught on. Trade settled in yuan, and not the US dollar, is said to now amount to about 10 percent of China’s total trade – it was less than 1 percent a year ago.

Even within China, some doubt the impact of the deal. The Financial Times reported the following, “Liang Meng, a researcher with the People’s Bank of China, acknowledged that the vow to settle more trade in renminbi would by itself change little. ‘It’s not like the unimpeded global flows of the dollar. To invest in China, you still have to go through intermediary channels,’ he said in the commerce ministry’s newspaper.”

As for the bond buys, the amount involved is not a sizable amount. Reports indicate the amount involved would be around $10 billion in Japanese buys of Chinese bonds – the so-called Dim Sum bonds. But that market cap is only pegged at $30 billion.

In addition, Japanese officials stressed it was not an effort on the part of Japan to diversify its holdings.

Comments: It will take time to determine whether the deal between Japan and China was more than symbolic. It marks yet another step by China to further integrate itself into the world, but most indicate the actions so far are very small steps.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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