2010年12月31日 星期五

中日企業一點: the yuan defeating the yen?

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photoThe yen mark stands for the Chinese currency on this signboard advertising yuan-denominated financial products in Hong Kong. (Keiko Yoshioka)

Although the Chinese yuan is criticized as being artificially undervalued, its status and influence have certainly appreciated in terms of trade settlements and overseas projects.

Like the Japanese yen in the early 1970s, the yuan, also called the renminbi, is slowly but surely coming of age.

Although the Chinese currency is unlikely to become a global standard anytime soon, its increased use in trade transactions could undermine the current power of the yen, eating away profits of Japanese financial institutions and affecting investments in Japan, watchers say.

Beijing continues to strictly regulate trading of the yuan. But the rising power is easing other restrictions to transform the yuan into a currency that is convenient for settling transactions by Chinese companies, which are increasingly entering overseas markets.

The Chinese government fears than an overreliance on the U.S. dollar poses a risk, because if the U.S. economy falters, the greenback could plummet and devastate China's foreign currency reserves.

Following the Asian currency crisis in the late 1990s, Beijing kept a tight rein on any attempts to liberalize the yuan, fearing drastic fluctuations in deposits or withdrawals.

But after the collapse of U.S. investment bank Lehman Brothers in autumn 2008, Chinese officials started expressing concerns about the dangers of holding on to dollars.

In July 2009, China lifted a ban on using the yuan for trade settlements between five Chinese cities, including Shanghai, as well as Hong Kong, Macao and the 10 ASEAN countries.

Beijing has since further eased the restrictions.

The volume of transactions settled in yuan still account for only a small fraction of total settlements. But Lian Ping, chief economist at the Bank of Communications, said, "The proportion should reach around 10 percent in three to five years."

Since the summer, the Shanghai currency exchange added the Malaysian ringgit and Russian ruble to the list of currencies with which the yuan can be directly traded. The list already included the U.S. dollar, the yen, the euro, the pound and the Hong Kong dollar.

The increased direct trading of the yuan with a variety of currencies will enable Chinese businesses to avert risks brought about by exchange rate fluctuations and reduce transaction costs.

Beijing is reportedly considering adding the Brazilian real to the list.

China's rising influence on the global stage has also pumped up the yuan's status, as shown by the growth of yuan-denominated loans that Beijing is extending to developing countries.

Projects covered by the yuan loans, namely railroad, dam and highway construction projects, will involve Chinese businesses and the settlement of large numbers of Chinese near the sites. Sprawling economic zones where the yuan is used will be created as hotels and merchants start accepting the Chinese currency.

"The age when the yuan was only used in transactions in border areas (with China) has become a thing of the past," said Hiroshi Mogi, of Mitsubishi Corp. (Hong Kong) Ltd. "As more Chinese businesses go overseas, the areas where the yuan can be used will expand."

Chinese Premier Wen Jiabao also declared recently that "China intends to gain a voice in international organizations that is on par with its economic power."

As a contributor to the International Monetary Fund, China rose from sixth to third last fall, and is closing in on second-ranked Japan.

Until now, most key posts at Asian organizations have been reserved for Japanese.

"China does not have the kind of human talent capable of controlling international finance," a senior Japanese Finance Ministry official said.

Beijing obviously disagrees.

A rift has emerged among officials of ASEAN Plus 3 (Japan, China and South Korea) over who should head a Singapore-based economic research office.

Japan has been pushing for the appointment of a well-connected person who is also well versed in economic cooperation in the Asian region. Beijing has insisted on a former senior official from the People's Bank of China, China's central bank, who has also worked at the IMF.

China's push is seen as an attempt to help raise the international profile of the yuan.

But many experts play down Beijing's intentions.

"The renminbi is still subject to many restrictions, and it certainly is not yet in a position to replace the dollar," said Yu Yongding, who teaches at the Chinese Academy of Social Sciences.

Yu said the Chinese government simply decided to end its overdependence on the dollar, which is subject to fluctuations stemming from U.S. policy.

Jin Canrong, who teaches at the Renmin University of China, said that rather than strive for a single Asian currency, "it is more realistic to push for the internationalization of the yuan."

Beijing also has ambitions to bolster Shanghai into a global financial market in the same club as New York and London.

"The Chinese government is slowly easing regulations using Hong Kong as a testing ground," said Eiichi Sekine of the Nomura Institute of Capital Markets Research.

Whatever China's intentions, the rising standing of the yuan will have an impact not only on the yen, but also the Japanese economy.

Experts say reduced trading of the yen would deal a major blow to the revenues of financial institutions and dampen investment in Japanese stocks and bonds.

Tokyo aggressively raised the yen's status in international markets in the 1980s and 1990s. After the government completely deregulated capital trading in 1998, the process became complete.

"It was our predecessors' ambitions to see the yen claim the dominant position in the Asian market, just as the dollar dominated the Western Hemisphere," said Hiroshi Watanabe, president of the Japan Bank for International Cooperation and a former vice finance minister for international affairs.

However, since 2000, Tokyo has shifted its policy.

"We have taken all measures that are necessary by eliminating regulations. Circulation of currencies should be left up to demand in the market," said a senior Finance Ministry official.

Partly due to this stance, cross-border trade settlements in yen have remained unchanged over the last 20 years, accounting for about 40 percent of exports from Japan and 20 percent of imports.

In April, the yen ranked third, following the U.S. dollar and the euro, as the preferred currency for foreign exchange trading. But in June, it accounted for only 3 percent of foreign currency reserves around the world.

While this has prompted some old-timers from the Finance Ministry to suggest increasing the use of the yen in settlements by Japanese companies going abroad, one current ministry official scoffed at such concerns.

"It is still premature to hold discussions about the yuan defeating the yen," the official said.

(This article was written by Naoyuki Fukuda and Keiko Yoshioka.)