China, Japan bond over trade

Japanese Prime Minister Yoshihiko Noda did visit China before the end of 2011, even though his original schedule was postponed. And despite predictions that Noda's first official visit to China will not be fruitful, Chinese and Japanese leaders reached an agreement to strengthen financial cooperation, creating an impact on East Asia and the world beyond.

After the end of his visit an online statement issued by the People's Bank of China (PBOC) said the Sino-Japanese agreement covers a wide range of areas, from the direct use of the Chinese yuan and Japanese yen in cross-border transactions and creation of conditions for Japan to directly invest in yuan in China to the development of a direct trading market of the yuan and yen. The realization of most parts of the bilateral cooperation agreement is condition to China reforming its financial institutions on the principles of market economy.

The financial and monetary cooperation between the second and third largest economies will certainly influence the global market. The proposed direct use of the yuan and yen in bilateral trade, approval of Japanese companies to issue yuan bonds in Tokyo and other overseas markets, and the other measures will help restructure the dollar- and euro-dominated global financial market and expand Sino-Japanese trade.

Learning a tough lesson from the global financial crisis, China and Japan are taking concrete actions to promote the G20 consensus to reform international financial institutions by introducing a crisis-prevention mechanism to East Asia on the framework of the Chiang Mai Initiative.

Besides, East Asia is the major overseas market for Chinese and Japanese companies both, and the direct use of the yuan and yen in cross-border transactions even at non-governmental levels will increase the influence of the two countries' currencies and attract more countries in the region to do the same, and thus help reshape the global financial market structure.

The PBOC statement also said that applications from Japan to buy Chinese government bonds are already being processed, which, from a diplomatic perspective, is a sign of goodwill on the part of Japan with more than one implication. First, China's economic development amid global economic recession will bring about great changes in the world market. This is an important reason why Japan has become increasingly reliant on China on the economic front, even though it follows the United States in the diplomatic and security fields to contain China.

After a decade's stagnation, the Japanese economy staged an export-led revival thanks to the demand in emerging economies such as China. Though Japan went into recession later partly because of the global financial crisis, it suffered much less than the US and some European economies because of the demands from the Chinese market. The earthquake and tsunami followed by the Fukushima Daiichi nuclear power plant accident last year dealt a heavy blow to Japan, but its economy has been recovering again thanks to the demands from the Chinese market.

Therefore, despite joining hands with the US to contain China, Japan has to strengthen its ties with China for its economic development.

Second, having the highest debt-to-GDP ratio among developed countries, Japan faces a potential financial crisis. The crisis, once it breaks out, will run out of control, and in such a situation China can be its biggest savior, because the US and eurozone countries are mired in their own debt crises.

Third, the purchase of Chinese government bonds by Japan, though their value is less than 1 percent of the US bonds it holds, has a symbolic meaning. Apart from being a breakthrough in bilateral cooperation, it has made some people ask whether Tokyo is sending a signal to Beijing to buy Japanese bonds in return. The answer is probably "yes".

Noda is perhaps more aware of the potential crisis ahead of Japan than most of his predecessors. Japan's draft budget for the next fiscal year indicates that the country will issue more deficit-covering bonds this year. But with its credit rating downgraded, Japan has to rely on China rather than private capital at home to buy government bonds.

Indeed, China has bought Japanese government bonds recently. But it did so only for commercial interests and could buy and sell the bonds rather flexibly. With its budget deficit ballooning, Tokyo wants Beijing to buy Japanese government bonds on a larger scale to help boost the Japanese economy.

The problem is that if China buys Japanese on a very large scale, it will upset the US because it is the most important buyer of US bonds. Also, Japanese right-wingers could object to really large-scale buying by China.

Sino-Japanese financial and monetary cooperation is a mutually beneficial process and can help reshape the global financial market structure. And China should reciprocate Japan's gesture of buying Chinese bonds by purchasing Japanese bonds accordingly, though it has to take measures to prevent loss.

In fact, China could lend a helping hand to not only Japan, but also to the US and European countries as its capacity allows, because such actions would help fulfill its responsibilities as a responsible power and be conducive to developing a stable environment for its economic development.

The author is deputy director of the department of Chinese trade studies at the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce.

(China Daily 01/06/2012 page9)