This marks the latest progress in the internationalization of RMB after China recently signed 70 billion yuan and 10 billion yuan worth of currency swap deals with Thailand and Pakistan, respectively.
Amid the Asian financial crisis in the late 20th century, the Chinese government implemented a stable exchange rate policy, making the RMB widely accepted in the region. At the same time, due to China's strong economic growth and international payments imbalances, the RMB has attracted great attention from the international community. The internationalization of the RMB became China's official strategy after the sub-prime crisis. Authorities hoped that through this strategy the country could reform the international financial system, allowing China to enjoy the benefits of international trade and investment.
In order to facilitate the process of the internationalization of the RMB, the Chinese government is keen on signing bilateral currency swap agreements and is committed to promoting the RMB as the settlement currency for international trading as well as the development of RMB bonds in Hong Kong. Since 2008, a total of 14 countries and regions have signed currency swap agreements with China, with the total amount reaching 1.3 trillion yuan.
The development of the offshore renminbi is also proceeding rapidly, with global financial centers including London and Singapore showing strong interest in becoming offshore RMB centers. Hong Kong has become a leader in the offshore RMB market. According to a press release on the website of Hong Kong Financial Secretary's Office, between December 2007 and July 2011, a total of 72 offerings in RMB bonds were issued in Hong Kong, with total proceeds exceeding 123 billion yuan.
Analysts generally believe that the signing of the new Sino-Japanese currency swap agreement will help improve the yuan's international status. China and Japan are the world's second and third-largest economies, with strong trade and investment linkages between the two countries. According to the 2011 annual report by the Japan External Trade Organization (JETRO), Sino-Japanese bilateral trade reached a record US$301.887 billion in 2010 and Sino-Japanese bilateral investment reached US$7.562 billion during the same year. Currently, transactions between the two countries are mainly in U.S. dollars, with local currencies being converted into dollars before transactions are conducted. Under the newly-signed currency swap agreement, the two countries can transact directly in each other's currency, greatly increasing the yuan status in international trade.
As the world's second-largest holder of foreign exchange reserves, Japan is also actively seeking to diversify its foreign exchange reserves. According to a previous report by Nikkei, Japan will buy up to US$100 billion worth of yuan-denominated treasury bonds, a move which would likely greatly boost the international recognition of the currency.
Japan started a trial internationalization of the yen as early as 1964. However, this process eventually stalled. Currently, there is no dominant currency in East Asia, with the yen the biggest rival of the RMB in reaching such a status. The newly signedcurrency swap appears to signal an acceptance by the Japanese of the renminbi dominance. Barry Eichengreen, an economist with University of California at Berkeley, said during an interview with the Wall Street Journal that "what new here is that (China is) working with and have the support of the Japanese government, which seems to be acknowledging implicitly that there will be a single dominant Asian currency in the future and that it won be the yen."
However, many critics were more cautious about the significance of the new deal. In the same Wall Street Journal story, Morris Goldstein, an economist with Peterson Institute for International Economics, said "the China-Japan initiatives will obviously increase the regional use of the yuan, although much depends on their scale and timing. That said, I don see them as game changers in the broader issue of if and to what extent the yuan becomes a serious rival to the dollar as the dominant global currency."
A report by the Financial Times in Britain said that the new accord was only " a symbolic move" because "encouraging the use of the countries own currencies for settling bilateral trade had already been possible since a reform by Beijing in mid-2010. Yet the amount of trade that has been settled between yen and renminbi has been so minimal that official statistics measuring such flows do not exist. "
Despite the fact that the internationalization of RMB is well underway, the impact of the Sino-Japanese currency swap agreement remains to be seen.
