China and Japan starts direct currency trading

China and Japan on Friday began to exchange their currencies directly without going through the dollar, a reform designed to boost trade between Beijing and Tokyo, which want to expand the international role of their currencies.

The exchange rate of yuan-yen was first posted on the site of Tokyo, where the first direct trade began shortly after 0000 GMT. During the first quotations made through large Japanese banks, the Chinese yuan was trading at 12.335 Japanese yen, a level almost identical to that of the previous day. A half hours after the start of trading, the rate was 12.36. Direct exchange of the yen and the yuan were then open at 9:30 local time (1:30 GMT) in Shanghai, the economic capital of China. The two currencies could already be traded before, but using the dollar as the linchpin in determining the exchange rate. Because of this system, 60% of bilateral transactions are currently traded in dollars.

In Shanghai, the yuan against the yen is now moving within a fluctuation band of plus and minus 3% from a central course, that China’s central bank fixes each morning after ascertaining market participants. Friday morning, the central rate was set at 8.0686 yuan to 100 yen, or about 12.394 yen to yuan. At the opening of the first exchanges, the price reached 8.1074 for 100 yen. People’s Bank of China (PBOC, central bank) makes a similar manner to secure daily fluctuation of the yuan against the dollar within a fluctuation band of plus and minus 1%.

The yen is the second major currency after the dollar, for which the Chinese authorities have agreed to establish a system of direct exchange. The yuan is traded against seven other currencies (euro, British pound, Australian dollar, Canadian dollar, Hong Kong dollar, Malaysian ringgit and Russian ruble), but always through the U.S. dollar. The Sino-Japanese decision to launch this direct exchange after a series of bilateral agreements concluded in late December, to facilitate and enhance trade and investment between China and neighboring Japan, the second and third global economic powers.

On Chinese side, the direct exchange yuan / yen seems to be part of the long-term strategy of Beijing aimed at developing the international role of its currency. “The direct exchange of the yuan and the yen is merely a step on the road towards the yuan to become a reserve currency,” said Zhang Zhiwei, chief economist at Nomura Securities. However, the Chinese yuan has “a long way to go” to become a freely convertible currency. Currently, the yuan is not convertible on capital accounts, which means that funds invested in yuan in the capital of an enterprise can not be exchanged against foreign currencies. This protects China against some speculative capital movements. The direct exchange between the yen and the yuan “is an important step in the internationalization of the Chinese currency, which answers the growing demand for payments and transactions of yuan in the world”, commented David Liao, HSBC China.

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