China-Japan Currency Deal Points Way to a New World Monetary Order
By the Editors
Bloomberg.com
Dec 28, 2011
The agreement announced between China and Japan to strengthen financial ties and promote yuan-yen trade is a small, but notable, step toward a new global economy. Its immediate practical significance is limited, yet the deal signals that a deeper transformation is under way — and one that the world should welcome.
The plan was a surprise: It marks a warming of relations that had been chilly of late. The accord still lacks a timetable for implementation, but once in force it will let Chinese and Japanese trading companies switch between yuan and yen without converting to dollars first. This will encourage commerce by reducing currency risk and trading costs.
The agreement announced between China and Japan to strengthen financial ties and promote yuan-yen trade is a small, but notable, step toward a new global economy. Its immediate practical significance is limited, yet the deal signals that a deeper transformation is under way — and one that the world should welcome.
The plan was a surprise: It marks a warming of relations that had been chilly of late. The accord still lacks a timetable for implementation, but once in force it will let Chinese and Japanese trading companies switch between yuan and yen without converting to dollars first. This will encourage commerce by reducing currency risk and trading costs.
The agreement will let a Japanese-backed institution sell yuan bonds in China, helping to open China’s capital market. In return, Japan will convert some of its foreign- exchange reserves into Chinese bonds. China has signed financial pacts with other nations, mainly in Asia, but the size of China-Japan trade — $340 billion last year, and growing fast — makes this deal the most important by far.
Warmer relations and short-term benefits for regional trade, though, are not the main reasons the agreement matters. China seeks a bigger role for its currency in global markets, and wants power in international forums that is commensurate with its economic might. The sooner its currency is fully convertible and its economy is open to global investment, the sooner this will happen.
Nudging the Yuan
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