China and Japan will promote the use of their currencies for trade and investment, according to an agreement that analysts said was largely a symbolic move as it was short on details. The two Asian economies said that they wanted to reduce costs and risks for their companies – an implicit call for less reliance on the dollar, which is currently their predominant medium of exchange.
Japan also confirmed a plan to buy Chinese government bonds, which would mark the first time it has added renminbi-denominated debt to its foreign exchange reserves. Analysts said the agreement could help boost the renminbi’s role in Asia and internationally but that it was only one of the many tiny steps that Beijing has taken to elevate its currency’s status and that the dollar’s position as the world’s premiere reserve currency was safe for now.“It’s a symbolic move. Before Japan has tried to promote the yen as the only international currency for Asia, so this will be welcomed by the Chinese government,” said Shen Jianguang, an economist with Mizuho Securities.
Separately, the US Treasury on Tuesday again declined formally to name China as a currency manipulator, though it said that the pace of appreciation of the renminbi was inadequate. In its twice-yearly currency report, which it has taken to releasing at times when it is unlikely to get extensive media coverage, the Treasury continued to call for Beijing to allow more flexibility in the renminbi while saying that China’s currency regime did not meet the formal definition of manipulation. Although the “manipulation” designation has achieved symbolic political importance in the US Congress, naming China as a manipulator would merely require the Treasury to enter into negotiations with Beijing – something that Treasury officials say they are already doing in any case. While trade flows have boomed between China and Japan, their formal political co-operation has been stunted by tensions from territorial disputes to historical wounds.
Both countries said that the financial agreement, signed after Yoshihiko Noda, Japan’s prime minister, visited Beijing on Christmas day, was intended to foster greater co-operation and stability. It will, however, take time to gauge whether their pact was significant in economic terms. Although Chinese media reports made a big deal of the pledge to encourage the use of the countries’ own currencies for settling bilateral trade, this had already been possible since a reform by Beijing in mid-2010. Yet the amount of trade that has been settled between yen and renminbi has been so minimal that official statistics measuring such flows do not exist.
Chinese companies buying goods from Japan convert their renminbi into dollars to make purchases since their Japanese counterparts are still reluctant to accept the Chinese currency. Japanese companies likewise convert their yen into dollars when buying from China. The key obstacle to promoting such trade has been China’s reluctance to relax controls on its capital account, meaning that foreign companies that receive its currency have nowhere to invest it apart from the offshore renminbi base of Hong Kong.
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.
Japan also sought to downplay its plan to purchase up to $10bn of Chinese government bonds. An unnamed Japanese official was quoted in Chinese media as saying that this was an expression of economic co-operation, not an attempt at diversification of its foreign exchange reserves. Over the past five days, China has also signed currency agreements with Thailand and Pakistan, opening bilateral swap lines worth Rmb70bn and Rmb10bn, respectively. “These are all little parts of the bigger picture of trying to internationalise the renminbi,” said Ken Peng, an economist with BNP Paribas.