China and Japan started direct currency trading today 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 US 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 rivalling 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,” Mr Zhang Zhiwei, chief China economist of Nomura Securities, said.
“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 said.
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.