December 27, 2011 in Business

China, Japan announce deals to tighten their financial ties

Joe Mcdonald Associated Press
 

BEIJING – Chinese and Japanese leaders have unveiled initiatives to tighten financial links between East Asia’s economic giants and sometime rivals – measures that could expand use of China’s tightly controlled currency abroad.

During a visit to Beijing by Japanese Prime Minister Yoshihiko Noda, the two governments said in a surprise announcement Sunday they will encourage use of their own currencies in bilateral trade, which now is conducted mostly in U.S. dollars.

They also agreed to support the sale of bonds denominated in China’s yuan by Japanese companies in Tokyo and foreign markets and by the state-owned Japan Bank of International Cooperation in mainland China’s markets, which are closed to most foreign investors.

The pledges were a striking step for China and Japan, which are the world’s second- and third-largest economies and are bound by billions of dollars in trade but whose political relations often are strained over conflicting territorial claims and other disputes.

“To support the growing economic and financial ties between China and Japan, the leaders of China and Japan have agreed to enhance mutual cooperation in financial markets of both countries and encourage financial transactions between the two countries,” the governments said in identically worded statements.

They said Japan’s government also planned to purchase Chinese government bonds, and an application process for official approval of that was under way.

The governments gave no timetable for practical steps to put the pledges into action or the size of possible bond offerings.

The moves might reduce the dominance of the U.S. dollar in East Asia, the world’s fastest-growing region. The Kyodo News agency cited a Japanese official who told reporters some 60 percent of trade between Japan and China is now settled in dollars, which requires companies to convert money between yen, dollars and yuan, adding to their costs.

Beijing controls the yuan’s exchange rate and the flow of money into and out of China’s booming economy. But the government has begun allowing limited use of yuan for trade. It said this month that some companies that obtain Chinese currency abroad will be allowed to invest it in mainland financial markets.

The communist government keeps China’s bond and other financial markets sealed off from global financial flows. That helped the country avoid the turmoil of the 2008 global financial crisis but has slowed the development of markets that Chinese leaders want to support economic development.

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