A new initiative from the loins of China’s central bank is to come into play at the end of this week and is set to make trading between Asia’s two largest economies much easier. The nation’s bank confirmed Tuesday that, as of Friday, it will allow direct trading of its currency (the yuan) against the Japanese yen and other international currencies, without the need to trade via the dollar as has previously been the case.

The move will make the yen the first major currency aside from the USD that can be traded directly with the renminbi and is part of a co-ordinated effort to strengthen cooperation between China and Japan across trade and finance markets.

Japanese Fin Min Jun Azumi, who announced the decision in Tokyo, has emphasised the cost benefits behind the switch to a more international yuan. "By conducting transactions without using a third country’s currency, it will bring merits of reducing transaction costs and lowering risks involved in settlements at financial institutions”, he said. “It will also contribute to improving convenience of both countries’ currencies and reinvigorate the Tokyo market."

“Pushing forward”

Currency experts are also united in the view that this will be an important move towards the internationalisation of the yuan; already the world's third largest currency in issuance of credit. Professor Ding Zhijie, dean of School of Banking & Finance, UIBE, said, "It raises the convertibility of the yuan. And I believe the yuan trading will be accepted by more Asian economies as well as the international markets. It will also push forward the internationalization of the yuan."

A number of banks based in both China and Japan will begin the direct trading on Friday, including Bank of Tokyo-Mitsubishi UFJ and Bank of China. Huang Jiaying, trade with Bank of China has spoken positively of the long-term potential for the yuan: "The move will likely make the yuan accepted by more Japanese investors as well. It will also help boost the possibility of the yuan becoming an internationally-settled currency, which is an important move of propelling the yuan to become an international reserve currency."

Concerns linger

The move comes at a time when investor fear over the global economic slowdown and its impact on Chinese growth has already caused economists to reduce growth expectations from 7.5 to 6.4 percent so far this quarter. Misgivings off the back of Spain’s continued plight have already seen the CNY/USD tumble this morning with the dollar at CNY6.3577 around 0830 GMT, higher than Tuesday's close of CNY6.3480 according to live forex charts. This represents its lowest level in over five months and has now dropped a total of 1 percent since the start of 2012, prompting discussion of further heavy-handed economic stimulus which has some investors concerned.

Despite some optimism about the symbolic strengthening step taken between Japanese and Chinese markets, some forex experts are not convinced of the long-term benefits of the move by the Chinese national bank. With the dollar/yuan still controlled under a floating band and the capital and financial markets not fully liberalised, "it's unlikely the trade between yen and yuan will increase dramatically," said Daisaku Ueno, senior foreign exchange and fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

Sarah Cox, Staff Writer