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Shanghai Hyron Software Co., having business relations with the Japanese market, started receiving favor from investors recently thanks to the June 1 official start of direct yen-yuan trading in the Shanghai and Tokyo markets.
The move makes the yen the first major currency besides the U.S. dollar that can be directly traded with the yuan. Conducting transactions without using a third country’s currency will reduce transaction costs and lower risks involved in settlements at financial institutions.
Last year, Hyron Software registered a revenue of 312 million yuan ($49.5 million) in the Japanese market, accounting for about 80 percent of its gross revenue. Japan also contributed to almost 90 percent of Hyron’s profits from main businesses. In the days to come, direct yen-yuan exchange will definitely benefit the company by significantly cutting down trade settlement costs.
China’s central bank said the development of the direct trading of the yuan and the yen will enhance their statuses in bilateral trades and investments, strengthen financial cooperation and shore up the increasingly expanding Sino-Japan business interactions.
Beneficial leap
At the micro-level, firms like Hyron Software are the biggest winners since direct yen-yuan trading means lower exchange costs in SinoJapan business activities.
China, Japan’s fourth largest trade partner, also has the island country as its second business associate. Last year, Sino-Japan trade totaled $344.9 billion. With the direct trading policy adopted, a total of $3 billion will be saved in transaction costs.
“At the macro-level, direct trading will contribute to improving convenience of both countries’ currencies and reinvigorating the Tokyo market,” said Ding Zhijie, professor of the University of International Business and Economics.
Both sides can also take it as a means not only to manage and reform the international monetary system, but also to improve mutual understanding and regulate exchange rates and foreign exchange markets.
Ding notes that direct yen-yuan exchange can also show the rest of the world their confidence in building a free trade area among China, Japan and South Korea.
At the Fifth Trilateral Summit Meeting among the three countries held in Beijing on May 13, Chinese Premier Wen Jiabao, South Korean President Lee Myung Bak and Japanese Prime Minister Yoshihiko Noda agreed on the start of the China-South KoreaJapan Free Trade Area (FTA) talks within 2012. With a 1.5-billion population, the FTA, making up 20 percent of the world’s economy and 70 percent of the Asian economy, will match North America and the EU to become the world’s third economic zone.
Financial cooperation is a major condition in establishing a FTA, while direct currency trading is an indispensable prerequisite. The direct yen-yuan trading will undoubtedly give a boost to the trilateral talks, showing a proactive gesture on this issue.
Actually, the China-South Korea currency settlement was put into practice on a trial basis. As trilateral free trade continues to ex- pand, direct trading will not just be limited to the yuan and the yen—the South Korean won is also likely to follow suit.
Yuan globalization
“It is an important step for the globalization of the yuan, and marks the entry of the Chinese currency to the world monetary market,” said Zhang Bin, a researcher at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
To go global, the yuan has to serve as a settlement currency first through trading. Besides the U.S. dollar and euro, the Japanese yen is a major settlement currency. The Chinese yuan is the settlement currency for the world’s second largest economy. Through direct trading with the yen, the yuan is more likely to be accepted by the international market, since Tokyo is one of the most vibrant foreign exchange markets.
Since the breakout of the global financial crisis, China has taken the initiative to push the yuan’s globalization by expanding yuan settlement in cross-border trade and investment. China has also signed currency swap agreements worth over 1.9 trillion yuan($304.7 billion) with 19 countries.
Nevertheless, for many years, the exchange rate of the yuan has been pegged to the U.S. dollar, and its rates against other currencies are worked out by calculating cross rates, which leads to the rigidity and distortion of the exchange rate formulation mechanism. Thus, direct yen-yuan trading will increase the transparency, authenticity and autonomy of the yuan, cutting down exchange costs and helping push the yuan’s globalization.
Ding said direct exchanges in the Tokyo foreign exchange market will raise the convertibility of the yuan, and reduce the dependence on the U.S. dollar in the free exchange between the yuan and Japanese yen, which will contribute to the formation of a more balanced international monetary system.
Direct yen-yuan trading suggests future yuan reforms will focus on two aspects. One is the evolution from the current managed floating exchange regime based on market supply and demand to a free floating exchange regime, the other is more openness for capital accounts. Caution should be taken when proceeding with these reforms in the course of the yuan’s globalization.
Unaffected dollar
Some media reports say that because China and Japan rank second and third in the global economy respectively, direct yen-yuan trading indicates a declining role for the U.S. dollar.
Tan Yaling, Director of the China Foreign Exchange Investment Research Institute, said the power of the U.S. dollar would not be weakened.
“The U.S. dollar is like an anchor for currencies across the globe, and the yuan and the yen are tradable now. They have to be tagged to the dollar.”
“In the past, the yuan’s exchange rate against the yen was calculated by compar- ing their respective rates with the U.S. dollar. From now on, it will be figured out according to the quoted prices offered by market makers. But it is inevitable for these market makers to take into account the fluctuations of the yen against the U.S. dollar exchange rate when giving the yuan exchange rate with the yen,” explained Tan.
“Neither Chinese nor foreign-funded banks can produce yen vs. yuan exchange rates regardless of the U.S. dollar,” said Zhao Qingming, a researcher with China Construction Bank.
Considering that the foreign exchange market works around the clock, commercial banks always convert small currencies like the Japanese yen and Chinese yuan into the major currency, which commonly means the U.S. dollar, in order to avoid exchange rate risks. “That’s to say, even if the size of the trade grows remarkably, Chinese or Japanese commercial banks cannot go without the U.S. dollar as the anchor,” said Zhao.
Currency Swap Agreements Signed by China
The move makes the yen the first major currency besides the U.S. dollar that can be directly traded with the yuan. Conducting transactions without using a third country’s currency will reduce transaction costs and lower risks involved in settlements at financial institutions.
Last year, Hyron Software registered a revenue of 312 million yuan ($49.5 million) in the Japanese market, accounting for about 80 percent of its gross revenue. Japan also contributed to almost 90 percent of Hyron’s profits from main businesses. In the days to come, direct yen-yuan exchange will definitely benefit the company by significantly cutting down trade settlement costs.
China’s central bank said the development of the direct trading of the yuan and the yen will enhance their statuses in bilateral trades and investments, strengthen financial cooperation and shore up the increasingly expanding Sino-Japan business interactions.
Beneficial leap
At the micro-level, firms like Hyron Software are the biggest winners since direct yen-yuan trading means lower exchange costs in SinoJapan business activities.
China, Japan’s fourth largest trade partner, also has the island country as its second business associate. Last year, Sino-Japan trade totaled $344.9 billion. With the direct trading policy adopted, a total of $3 billion will be saved in transaction costs.
“At the macro-level, direct trading will contribute to improving convenience of both countries’ currencies and reinvigorating the Tokyo market,” said Ding Zhijie, professor of the University of International Business and Economics.
Both sides can also take it as a means not only to manage and reform the international monetary system, but also to improve mutual understanding and regulate exchange rates and foreign exchange markets.
Ding notes that direct yen-yuan exchange can also show the rest of the world their confidence in building a free trade area among China, Japan and South Korea.
At the Fifth Trilateral Summit Meeting among the three countries held in Beijing on May 13, Chinese Premier Wen Jiabao, South Korean President Lee Myung Bak and Japanese Prime Minister Yoshihiko Noda agreed on the start of the China-South KoreaJapan Free Trade Area (FTA) talks within 2012. With a 1.5-billion population, the FTA, making up 20 percent of the world’s economy and 70 percent of the Asian economy, will match North America and the EU to become the world’s third economic zone.
Financial cooperation is a major condition in establishing a FTA, while direct currency trading is an indispensable prerequisite. The direct yen-yuan trading will undoubtedly give a boost to the trilateral talks, showing a proactive gesture on this issue.
Actually, the China-South Korea currency settlement was put into practice on a trial basis. As trilateral free trade continues to ex- pand, direct trading will not just be limited to the yuan and the yen—the South Korean won is also likely to follow suit.
Yuan globalization
“It is an important step for the globalization of the yuan, and marks the entry of the Chinese currency to the world monetary market,” said Zhang Bin, a researcher at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
To go global, the yuan has to serve as a settlement currency first through trading. Besides the U.S. dollar and euro, the Japanese yen is a major settlement currency. The Chinese yuan is the settlement currency for the world’s second largest economy. Through direct trading with the yen, the yuan is more likely to be accepted by the international market, since Tokyo is one of the most vibrant foreign exchange markets.
Since the breakout of the global financial crisis, China has taken the initiative to push the yuan’s globalization by expanding yuan settlement in cross-border trade and investment. China has also signed currency swap agreements worth over 1.9 trillion yuan($304.7 billion) with 19 countries.
Nevertheless, for many years, the exchange rate of the yuan has been pegged to the U.S. dollar, and its rates against other currencies are worked out by calculating cross rates, which leads to the rigidity and distortion of the exchange rate formulation mechanism. Thus, direct yen-yuan trading will increase the transparency, authenticity and autonomy of the yuan, cutting down exchange costs and helping push the yuan’s globalization.
Ding said direct exchanges in the Tokyo foreign exchange market will raise the convertibility of the yuan, and reduce the dependence on the U.S. dollar in the free exchange between the yuan and Japanese yen, which will contribute to the formation of a more balanced international monetary system.
Direct yen-yuan trading suggests future yuan reforms will focus on two aspects. One is the evolution from the current managed floating exchange regime based on market supply and demand to a free floating exchange regime, the other is more openness for capital accounts. Caution should be taken when proceeding with these reforms in the course of the yuan’s globalization.
Unaffected dollar
Some media reports say that because China and Japan rank second and third in the global economy respectively, direct yen-yuan trading indicates a declining role for the U.S. dollar.
Tan Yaling, Director of the China Foreign Exchange Investment Research Institute, said the power of the U.S. dollar would not be weakened.
“The U.S. dollar is like an anchor for currencies across the globe, and the yuan and the yen are tradable now. They have to be tagged to the dollar.”
“In the past, the yuan’s exchange rate against the yen was calculated by compar- ing their respective rates with the U.S. dollar. From now on, it will be figured out according to the quoted prices offered by market makers. But it is inevitable for these market makers to take into account the fluctuations of the yen against the U.S. dollar exchange rate when giving the yuan exchange rate with the yen,” explained Tan.
“Neither Chinese nor foreign-funded banks can produce yen vs. yuan exchange rates regardless of the U.S. dollar,” said Zhao Qingming, a researcher with China Construction Bank.
Considering that the foreign exchange market works around the clock, commercial banks always convert small currencies like the Japanese yen and Chinese yuan into the major currency, which commonly means the U.S. dollar, in order to avoid exchange rate risks. “That’s to say, even if the size of the trade grows remarkably, Chinese or Japanese commercial banks cannot go without the U.S. dollar as the anchor,” said Zhao.
Currency Swap Agreements Signed by China