China and Japan almost ready to cut U.S. dollar

China and Japan almost ready to cut U.S. dollar out of their direct trade

Submitted by cpowell on Sat, 2012-05-26 20:41. Section: Daily Dispatches

Direct Yen-Yuan Forex Deal to Start in June

From Yomiuri Shimbum, Tokyo
Sunday, May 27, 2012

http://www.yomiuri.co.jp/dy/business/T120526002702.htm

Japan and China will likely initiate a foreign exchange system in which the yen and the yuan can be directly exchanged starting in June at the earliest, sources have said.

The Japanese and Chinese governments have entered the final phase of negotiations to establish foreign exchange markets in Tokyo and Shanghai and will likely reach an official agreement soon.

Currently the two countries' currencies are exchanged via the U.S. dollar and thus foreign exchange commissions are relatively high.

If the direct exchange system is realized, transaction commissions can be cut and the exchange procedure will be simpler. Some economists expect it will expand trade between Japan and China and make trade processing smoother.

The two governments agreed to establish the system in December last year when a Japan-China summit meeting was held in Beijing.

Since February, working-level panels from each country have been discussing the issue.

Currently, a system for exchanging the yen and the yuan is possible, but exchange markets are not well developed. Financial institutions have also not established respective systems for the exchange.

Unlike exchange deals for the yen and dollar, China does not employ a floating exchange rate in which a currency's value is determined by the market. Exchange rates between the yuan and U.S. dollar fluctuate within a limited range that the People's Bank of China announces every morning.

With the new bilateral exchange system, it is possible that the exchange rate between the two currencies will be decided freely by market forces.

If the exchange rate fluctuates wildly, however, some economists believe that the Chinese authorities will stabilize it with market intervention.

In fiscal 2011, Japan's exports to China amounted to 12.48 trillion yen, accounting for 19 percent of the nation's total exports.

Imports from China were 14.78 trillion yen, accounting for 21 percent of total domestic import value.

If the Japanese and Chinese currencies are traded directly, foreign exchange commissions from U.S. dollar transactions will disappear.

This will reduce the costs of trade and the two countries will be able to avoid exchange rate fluctuation risks associated with the U.S. dollar.

Companies doing business with China will experience significant cost reductions and bilateral trade will become easier.

From the Chinese side, an increase in the volume of exchange deals with Japan will result in increased circulation of the yuan outside China.

China likely aims to strengthen its currency's international influence, economists said.