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China and Japan Abandon the Hideous U.S. Dollar and Begin Direct Currency Trading


China and Japan started direct currency trading on Friday as Beijing marked another stage on its journey to foster the yuan’s use internationally in line with its growing economic clout.

Market participants can now swap Japanese yen for Chinese yuan without having to use the U.S. dollar as an intermediary currency, making foreign trade settlement more convenient and cutting transaction costs.

The move comes as China, the world’s second-largest economy just ahead of Japan, gradually moves to make the yuan freely convertible with an eye towards rivaling the mighty dollar, analysts said.

China maintains a tight grip on its currency, which is not convertible on the capital account, over fears that speculative flows could hurt its economy. That policy has long fostered trade tensions with the United States.

“Yuan-yen direct trading is just a small step toward making the yuan a reserve currency, but what’s foremost is whether China can carry out future reforms,” Zhang Zhiwei, chief China economist of Nomura Securities, told AFP.

“The move may be another step toward free convertibility of the currency, but from a long-term perspective, China has a long way to go,” he said.

On China’s national foreign exchange market, the yuan weakened against the yen on the first day of trading under the new practice, due to the Japanese currency’s overnight gains against the dollar, dealers said.

“Trading has been active this morning and demand for yen is mostly from China-based Japanese companies,” a dealer at a foreign bank in Shanghai told Dow Jones Newswires.

At midday, the yuan was bid at 8.1155 yuan to 100 yen, weakening from the open of 8.1074, according to the Shanghai-based China Foreign Exchange Trade System, the market operator.

British banking giant HSBC, one of the newly appointed market makers in China, said the launch of direct trading will help build a benchmark for non-dollar transactions.

Read Full Article Here:  http://www.japantoday.com/category/business/view/china-and-japan-begin-direct-currency-trading

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Discussion

One thought on “China and Japan Abandon the Hideous U.S. Dollar and Begin Direct Currency Trading

  1. You have touched on a very important topic. You are correct that China has a conscious long term goal to have the Yuan (Renminbi) replace the U.S. dollar as the preferred currency of world trade.

    Should that happen the United States is done as a world economic power.

    As it stands right now, low interest government borrowing on the strength of the dollar’s status a the currency of world trade is what is keeping the skyrocketing growth of U.S. sovereign debt marginally under control.

    It cost over $450 billion to service the U.S. national debt last year. When borrowing costs go back up again we will see the servicing costs for our debt increase dramatically each year.

    Posted by azleader | June 4, 2012, 9:17 pm

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