BEIJING – Japan and China are expected to start directly trading their currencies in June as part of efforts to boost bilateral trade and investment, financial sources in Beijing said Saturday.
With the new step, exchange rates between the yen and the yuan will be determined solely by transactions of the two currencies, eliminated the role played by the dollar in setting yen-yuan rates under the current system.
It will be the first time that China has allowed any major currency except the dollar to be traded directly with the yuan, also known as the renminbi, the sources said.
The yen-yuan exchange system would help businesses in China and Japan, the world’s second- and third-largest economies, and reduce the risks associated with exchange rate fluctuations in the dollar. It would also cut transaction costs involving the three currencies.
In addition, the system would increase the exposure of the yen and the yuan in global currency markets, while encouraging individual investors in Japan to purchase Chinese financial instruments.
Tokyo and Shanghai are expected to be the markets handling the currency exchanges.
Market participants said the new measure could give Tokyo an advantage in yuan trading over other financial centers, such as London and Singapore, which have also been calling for the creation of a mechanism allowing their currencies to be exchanged with the yuan.
The Finance Ministry, the Bank of Japan and the Financial Services Agency have been holding talks with the People’s Bank of China on direct yen-yuan trading since Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao agreed to boost bilateral financial cooperation at meeting in Beijing in December.
The Chinese central bank has been preparing for yen-yuan trading, such as examining ways to set a reference rate around which the yuan can fluctuate against the yen in a managed floating system, the sources said.
A Japanese banking source expressed hope the new measure would lead to steady growth of an exchange market for the two currencies, saying, “We see high potential demand for direct trading between the yuan and the yen.”
Li, Hatoyama discuss isles
Chinese Vice Premier Li Keqiang has met with former Prime Minister Yukio Hatoyama and expressed concern about rising tensions over the disputed Senkaku Islands in the East China Sea.
“We have seen a number of issues that could hamper bilateral friendship,” Hatoyama quoted Li as saying during a meeting in Beijing. Li was apparently referring to Tokyo Gov. Shintaro Ishihara announcement in April that the metropolitan government plans to buy three of the barren islets to cement Japan’s claim to them, as well as Japan’s decision to host the World Uighur Congress, which Beijing considers an organization intent on dividing China, from May 14 to 17.
“Such action made us wonder if the Japanese government has changed its policy toward China,” Li was quoted as saying.
Hatoyama, on a three-day visit to Beijing through Sunday, replied that Japan does not meddle with China’s domestic affairs.
“Not everything in Japan-China relations is running smoothly. There are times when we see waves rippling on the ocean,” Hatoyama told reporters after the meeting. “I told (Li) that it is important to boost bilateral exchanges, especially at such times.”