China, Japan begin directly trading currencies | Business| Economy and finance news from a German perspective | DW | 01.06.2012
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China, Japan begin directly trading currencies

China's efforts to turn promote the yuan as an international currency have been boosted as direct trading with Japan's yen has begun. The move ditches the US dollar as an intermediary currency.

Direct trading between the two countries' currencies was introduced to boost bilateral trade and investment, reduce financial transaction costs and balance foreign-exchange risks for financial institutions, the Japanese government said in a statement released Friday.

Chinais Japan's largest trading partner with bilateral trade valued at $345 billion (279 billion euros) in 2011.

Market participants can now directly swap Japanese yen for Chinese yuan, avoiding the use of the US dollar as an intermediary currency, thus saving the two countries an estimated $3 billion per year.

The move came as China - the world's second largest economy just ahead of Japan - is gradually making its currency freely convertible in attempts to establish the yuan as a globally important reserve currency.

In addition, it is designed to ease tensions with the United States, which has accused China of keeping its currency artificially low against the dollar to boost foreign trade.

Just last month, Beijing broadened the band in which the yuan is allowed to fluctuated against the US currency to 1.0 percent on both sides of a government-stipulated mid-point, compared with a previous 0.5 percent fluctuation range.

Growing importance

The yuan was allowed to fluctuate within a 3.0 percent band above or below a central parity rate, media reports said, although the Chinese government had not officially announced a trading range.

On Friday, Beijing set the daily mid-point at 8.0686 yuan to 100 yen, as direct market trading saw the Chinese currency opening at 8.1074, according to data released by the China Foreign Exchange Trade System - the operator of the country's national forex market.

In early trading in Japan, one yuan stood at 12.335 yen with traders in Tokyo telling the AFP news agency that rates in the two markets could be different at the outset, but were likely to "converge quickly."

"It's impossible to make money through price gaps between the two markets," Akira Hoshino, the head of foreign exchange trading at the Bank of Tokyo, told AFP.

British bank HSBC, which is one of the newly appointed market makers in China, told the same news agency that the launch of direct trading was a "significant step forward" in making the Chinese currency more international.

"This is supporting the growing demand for yuan payment and settlement globally," David Liao, managing director of global markets for HSBC, said in a statement.

uhe/sms (AFP, dpa)