China, Japan to launch yuan-yen direct trading

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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

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China FDI at record pace: overseas uptick, policy steady

Q1 inflow leaves country on course to surpass 2011 record of US$116bil

* FDI momentum is slowing though and trade outlook difficult

* Suggests policy will be biased towards supporting economy

BEIJING  - Reuters:  China bagged foreign direct investment (FDI) at a record-setting pace in the first three months of 2012 but an easing in its monthly momentum and a difficult trade outlook will keep monetary policy poised to compensate for any dip in capital inflows.

The first quarter inflow of US$29.8bil leaves China on course to surpass 2011's US$116bil record, even though inflows compared with a year earlier have fallen for five successive months, Commerce Ministry data showed.

A 53% leap in inflows to US$11.8bil in March from February typical after the Lunar New Year was a fresh sign that capital flow is firming enough to underpin money supply growth, following a US$124bil first-quarter jump in foreign exchange reserves, providing policy stays on its current pro-growth bias.

“I don't think this changes anything for monetary policy,” Alistair Thornton, economist at IHS Global Insight in Beijing, told Reuters.

Steady growth: Workers assemble automobile parts at Changan Ford Mazda Automobile plant in Chongqing. A 53% leap in inflows to US$ 11.8bil in March from February is a fresh sign that China’s capital flow is firming enough to underpin money supply growth— AP

 

China's government has been fine-tuning economic policy settings since the autumn of last year as the outlook for the global economy darkened, export growth sank and capital inflows a core component of money supply stalled.

The People's Bank of China (PBOC) has cut by 100 basis points (bps) the ratio of deposits banks are required to keep as reserves (RRR) to keep credit and money supply growth steady. The two moves added an estimated 800 billion yuan (US$127bil) of lending capacity to the economy.

The PBOC said last week that broad money supply rose 13.4% in March from a year earlier, stronger than market expectations for 12.9% and ahead of the previous month's 13% pace.

Economists forecast another 150 bps, or 1.2 trillion yuan in RRR cuts, for the rest of 2012 to help cushion China's worst slowdown since the global financial crisis of 2008-09.

“There are signs that the economy has reached a bottom, but there's nothing to suggest in recent data that equity investors should be positioning for a strong rebound or anything like a V-shaped recovery,” Thornton said.

EXTERNAL DEMAND

China's economic growth has slowed for five straight quarters. The annual growth rate in the first quarter eased to 8.1% from 8.9% in the previous three months, below an 8.3% consensus forecast in a Reuters poll.

Reasonably strong FDI and a return to an overall trade surplus of US$5.35bil in March heralds the prospect that a revival in global growth is lifting overseas demand just in time to compensate for a slowdown in the pace of domestic activity.

FDI is an important gauge of the health of the external economy, to which China's vast factory sector is orientated, but is a small contributor to overall capital flows compared to exports, which were worth about US$1.9 trillion in 2011.

Ministry of Commerce spokesman, Shen Danyang, told a news conference on the FDI data that the government was confident of achieving its target for trade growth in 2012 despite a difficult international economic backdrop.


China targets 10 percent growth for exports and imports in 2012, but both goals were missed in March when imports rose 5.3 percent and exports increased 8.9 percent over a year earlier.

Beijing has pledged to bring its current account into balance as it refocuses the economy more towards domestic consumption and away from volatile foreign demand for manufactured goods.

China's two biggest export markets faltered through 2011. Demand from the European Union was dogged by the sovereign debt crisis, while a U.S. recovery was slow to take hold, especially among consumers.

For the first quarter as a whole, Customs Administration data from China shows the value of total exports was $430.02 billion, while imports were $429.35 billion - bringing the trade account roughly into the balance targeted by the government.

"If we want export growth to be stable, we must ensure that policies are stable," Shen said. "If there are any policy adjustments, these adjustments will be more towards pro-exports rather than limiting exports."

CURRENCY RISKS

But he said some exporters were nervous about the outlook for their business, particularly after China loosened its tightly controlled currency regime by doubling to 1 percent the daily trading band for the yuan against the dollar.

"Some exporters are a little bit worried, so they are not so sure about taking long-term orders, but only took short-term orders, mainly because they are not confident in managing exchange rate fluctuations," Shen said.

The change, a crucial one as China further liberalises its nascent financial markets, underlines Beijing's belief that the yuan is near its equilibrium level, and that China's economy is sturdy enough to handle important, long-promised, structural reforms despite its cooling growth trajectory.

Slower growth is cautiously welcomed by China's leadership as it allows them to make reforms, particularly to prices the government sets, with a reduced risk of igniting inflation that the ruling Communist Party fears could trigger social unrest.

The widening of the yuan's trading band is the most significant adjustment made to China's currency regime since a landmark decision in 2005 to de-peg the yuan from the dollar, which set the Chinese unit on an appreciating path that has seen it gain about 30 percent against the dollar.

In tandem, China has encouraged direct settlement of international trade in yuan, amounting to 2.08 trillion yuan ($333 billion) in 2011, more than triple that in 2010, central bank data shows.

Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said 11.7 percent of March FDI flows were settled in yuan, up from 9.5 percent in February, 8.5 percent in January and 3.2 percent for all of 2011.

"Direct investment has become a new frontier for Chinese yuan internationalisation," he wrote in a note to clients.

Beijing targets $120 billion in FDI inflows for each of the next four years, drawing up new rules to encourage foreign investment in strategic emerging industries, particularly those that bring new technology and know-how to China.

The Q1 numbers are on course to achieve that.

"For foreign investors, China remains attractive compared to other countries," Zhao Hao, economist at ANZ Bank in Shanghai, said.

China's efforts to expand its own direct investments in foreign countries are surging. Outbound FDI rose 94.5 percent in the first quarter versus a year earlier to $16.55 billion.

"In the future, the trend is that FDI inflows will pick up while outbound FDI will rise even faster, so the net inflows will fall," Zhao said.

By Zhou Xin and Nick Edwards

China’s US$3.2 trillion headache

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ENTER THE DRAGON By YAO YANG

WHILE the downgrade of US government debt by Standard & Poor's shocked global financial markets, China has more reason to worry than most: the bulk of its US$3.2 trillion in official foreign reserves more than 60% is denominated in dollars, including US$1.1 trillion in US Treasury bonds.

So long as the US government does not default, whatever losses China may experience from the downgrade will be small. To be sure, the dollar's value will fall, imposing a balance sheet loss on the People's Bank of China (PBC, the central bank). But a falling dollar would make it cheaper for Chinese consumers and companies to buy American goods.

If prices are stable in the United States, as is the case now, the gains from buying American goods should exactly offset the PBC's balance sheet losses.

The downgrade could, moreover, force the US Treasury to raise the interest rate on new bonds, in which case China would stand to gain. But S&P's downgrade was a poor decision, taken at the wrong time. If America's debts had truly become less trustworthy, they would have been even more dubious before the agreement reached on Aug 2 by Congress and President Barack Obama to raise the government's debt ceiling.

That agreement allowed the world to hope that the US economy would embark on a more predictable path to recovery. The downgrade has undermined that hope. Some people even predict a double-dip recession. If that happens, the chance of an actual US default would be much higher than it is today.

Reason to worry: China’s US$3.2 trillion problem will become a 20-trillion-renminbi problem if China cannot reduce its current account surplus and fence off capital inflows. — AP

These new worries are raising alarm bells in China. Diversification away from dollar assets is the advice of the day. But this is no easy task, particularly in the short term. If the PBC started to buy non-dollar assets in large quantities, it would invariably need to convert some current dollar assets into another currency, which would inevitably drive up that currency's value, thus increasing the PBC's costs.

Another idea being discussed in Chinese policy circles is to allow the renminbi to appreciate against the dollar. Much of China's official foreign reserves have accumulated because the PBC seeks to control the renminbi's exchange rate, keeping its upward movement within a reasonable range and at a measured pace.

If it allowed the renminbi to appreciate faster, the PBC would not need to buy large quantities of foreign currencies.



International experience

But whether renminbi appreciation will work depends on reducing China's net capital inflows and current account surplus. International experience suggests that, in the short run, more capital flows into a country when its currency appreciates, and most empirical studies have shown that gradual appreciation has only a limited effect on countries' current account positions.

If appreciation does not reduce the current account surplus and capital inflows, then the renminbi's exchange rate is bound to face further upward pressure. That is why some people are advocating that China undertake a one-shot, big-bang appreciation large enough to defuse expectations of further strengthening and deter inflows of speculative “hot” money. Such a revaluation would also discourage exports and encourage imports, thereby reducing China's chronic trade surplus.

But such a move would be almost suicidal for China's economy. Between 2001 and 2008, export growth accounted for more than 40% of China's overall economic growth. That is, China's annual gross domestic product (GDP) growth rate would drop by four percentage points if its exports did not grow at all. In addition, a study by the China Centre for Economic Research has found that a 20% appreciation against the dollar would entail a 3% drop in employment more than 20 million jobs.

There is no short-term cure for China's US$3.2 trillion problem. The government must rely on longer-term measures to mitigate the problem, including internationalisation of the renminbi. Using the renminbi to settle China's international trade accounts would help China escape America's beggar-thy-neighbour policy of allowing the dollar's value to fall dramatically against trade rivals.

But China's US$3.2 trillion problem will become a 20-trillion-renminbi problem if China cannot reduce its current account surplus and fence off capital inflows. There is no escape from the need for domestic structural adjustment.

To achieve this, China must increase domestic consumption's share of GDP. This has already been written into the government's 12th Five-Year Plan. Unfortunately, given high inflation, structural adjustment has been postponed, with efforts to control credit expansion becoming the government's first priority. This enforced investment slowdown is itself increasing China's net savings, i.e., the current account surplus, while constraining the expansion of domestic consumption.

Real appreciation of the renminbi is inevitable so long as Chinese living standards are catching up with US levels. Indeed, the Chinese government cannot hold down inflation while maintaining a stable value for the renminbi. The PBC should target the renminbi's rate of real appreciation, rather than the inflation rate under a stable renminbi. And then the government needs to focus more attention on structural adjustment the only effective cure for China's US$3.2 trillion headache. - Project Syndicate

● Yao Yang is Director of the China Center for Economic Research at Peking University.

China Needs Urgent Review of U.S. Debt, Financial News Says

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By Bloomberg News (Updates with central bank governor’s comment in third paragraph.)

Aug. 11 (Bloomberg) -- China should urgently assess risks from being the main foreign investor in U.S. debt and diversify its foreign-currency reserves more quickly, the Financial News reported today, citing Xia Bin, a central bank adviser.                                      Image via Wikipedia

In the short term, China can adjust the structure of the reserves, the central bank publication cited Xia as saying. Longer-term, the key is to keep foreign-exchange holdings at a “reasonable” level, according to Xia, an academic member of the monetary policy committee of the People’s Bank of China.

Central bank Governor Zhou Xiaochuan pledged this month to “closely” monitor U.S. efforts to tackle its debt burden. The global stock market rout that saw Tokyo shares sliding this morning follows Standard & Poor’s downgrade of the U.S. debt rating from AAA and a widening of Europe’s sovereign-debt crisis.



China is the biggest foreign owner of U.S. Treasuries, with more than $1 trillion of the securities, and its foreign- exchange reserves are the world’s largest at more than $3 trillion.

The U.S. economy has entered a long cycle of economic weakening that will put pressure on China’s holdings of dollar assets, Xia wrote in a microblog on Aug. 6. He is the director of the Finance Research Institute at the Development Research Center of the State Council, China’s cabinet.

China should buy more non-financial assets with its reserves to diversify risks, Xia wrote, adding that the country should also pursue national strategic interests, and seek to globalize the yuan. He previously said that China should use its reserves to increase holdings of gold and some other precious metals.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net --Zheng Lifei. Editors: Paul Panckhurst, Nerys Avery.

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US dollar died, debt default is unimaginable, "playing with fire", creditors say

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The Day the Dollar Died 

UD debt default is unimaginable  By Emily Kaiser  SINGAPORE, Agencies

SINGAPORE - Allowing a brief US debt default to force government spending cuts is a "horrible idea" that could destabilize the world economy and sour already tense relations with big creditors, government officials and investors said on Wednesday.

A growing number of US Republican lawmakers think a technical debt default might be a price worth paying if it gets the White House to accept deep spending cuts. This idea, once confined to the party's fringe, is seeping into the mainstream, Reuters reported on Tuesday.

"How can the US be allowed to default?" said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally.

Indian officials say they have little choice but to buy US Treasury debt because it is still among the world's safest and most liquid investments. It held $39.8 billion in US Treasuries as of March, according to US data.

The US Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year. The US Treasury Department has said it will run out of borrowing room by August 2.

If Washington cannot make interest payments on its debt, the Obama administration has warned of "catastrophic" consequences that could push the still-fragile economy back into recession.

"It has dire implications for the economy at a time when the macro data is softening," said Ben Westmore, a commodities economist at National Australia Bank.

"It's just a horrible idea," he said.

The Republicans' theory is that bondholders would accept a brief delay in interest payments -- maybe a couple of days -- if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations later on.

But interviews with government officials and investors show they consider a default such a grim -- and remote -- possibility that it was nearly impossible to imagine.

"It just wouldn't happen," said Barry Evans, who oversees $83 billion in fixed income assets at Manulife Asset Management. "They would pay their Treasury bills first instead of other bills. It's as simple as that.

As for China, Washington's largest foreign creditor with $1.14 trillion in Treasuries as of March, a default could fray political and economic ties.

Yuan Gangming, a researcher with the government think tank Chinese Academy of Social Sciences, smelled some political wrangling behind the US debt debate as the 2012 presidential election draws nearer and said Republicans "want to make things difficult for Obama.

But with time running short before Treasury exhausts its borrowing room, Yuan said default was a real risk.

"The possibility is quite high to see a default of the US debt, which would harm many countries in the world, and China in particular," he said.



China warns U.S. debt-default idea is "playing with fire"

Emily Kaiser

(Reuters) - Republican lawmakers are "playing with fire" by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China's central bank said on Wednesday.

The idea of a technical default -- essentially delaying interest payments for a few days -- has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending, Reuters reported on Tuesday.

But any form of default could destabilize the global economy and sour already tense relations with big U.S. creditors such as China, government officials and investors warn.

Li Daokui, an adviser to the People's Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.

"I think there is a risk that the U.S. debt default may happen," Li told reporters on the sidelines of a forum in Beijing. "The result will be very serious and I really hope that they would stop playing with fire."

China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, U.S. data shows, so its concerns carry considerable weight in Washington.

I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value," Li said.

Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year. The U.S. Treasury Department has said it will run out of borrowing room by August 2.

If the United States cannot make interest payments on its debt, the Obama administration has warned of "catastrophic" consequences that could push the still-fragile economy back into recession.

It has dire implications for the economy at a time when the macro data is softening," said Ben Westmore, a commodities economist at National Australia Bank.

"It's just a horrible idea," he said.

Financial markets are following the U.S. debate but see little risk of a default.

U.S. Treasury prices were firm in Europe on Wednesday, supported by a flight to their perceived safety on the back of the Greek debt crisis and worries about a slowdown in U.S. economic growth.

Marc Ostwald, a strategist with Monument Securities in London, said markets were working on the assumption that the U.S. debt story "will go away." But nervousness would grow if a resolution was not reached in the next five to six weeks.

'WOULDN'T HAPPEN'

The Republicans' theory is that bondholders would accept a brief delay in interest payments if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations later on.

But interviews with government officials and investors show they consider a default such a grim -- and remote -- possibility that it was nearly impossible to imagine.

"How can the U.S. be allowed to default?" said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally."

Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world's safest and most liquid investments. It held $39.8 billion in U.S. Treasuries as of March, U.S. data shows.

The officials declined to be identified because they are not authorized to speak to the media.

Oman is concerned about the impact of a default on the currency reserves of the sultanate and its Gulf neighbors.

"Our economies are substantially tied up with the U.S. financial developments," said a senior central bank official, who spoke on condition of anonymity.

"It just wouldn't happen," said Barry Evans, who oversees $83 billion in fixed income assets at Manulife Asset Management. "They would pay their Treasury bills first instead of other bills. It's as simple as that."

Monument's Ostwald called the default scenario "frightening" and said bondholders' patience would wear thin if lawmakers persisted in pitching this strategy in the coming weeks.

"This isn't a debate, this is like a Mexican standoff and that is where the problem lies," he said.

Yuan Gangming, a researcher with the Chinese Academy of Social Sciences, a government think tank, smelled some political wrangling behind the U.S. debt debate as the 2012 presidential election draws nearer and said Republicans "want to make things difficult for Obama."

But with time running short before the U.S. Treasury exhausts its borrowing room, Yuan said default was a real risk.

"The possibility is quite high to see a default of the U.S. debt, which would harm many countries in the world, and China in particular," he said.

(Reporting by Kevin Lim and Jong Woo Cheon in Singapore, Suvashree Dey Choudhury in Mumbai, Aileen Wang and Kevin Yao in Beijing, Abhijit Neogy in Delhi, Marius Zaharia in London and Umesh Desai in Hong Kong; Editing by Dean Yates and Neil Fullick)


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