BEIJING--China strengthened its financial links with Japan by authorizing direct trading between its renminbi currency and the yen in June. It represents the boldest step yet that Beijing has taken in this direction.
Yi Gang, deputy governor of the People's Bank of China, spearheaded the move toward greater cooperation with Tokyo in financial markets.
In a recent interview with The Asahi Shimbun, Yi discussed his country's rapid growth in economic ties with Japan as well as the prickly bilateral political relationship, frequently strained by the territorial dispute over the Senkaku Islands and other issues.
Yi without question has more in-depth knowledge about international finance than any other person in China's financial sector. He also talked about changing dynamics in the global currency market and the future prospects for the renminbi.
Excerpts of the interview follow:
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Question: China's relations with Japan are plagued by a wide range of conflicts, such as the territorial dispute over the Senkaku Islands (known as Diaoyu in China) and issues related to perceptions of history. Why have you decided to promote financial cooperation with Japan?
Yi Gang: China and Japan are neighboring countries that are world's second and third largest economies. Cooperation between our two countries has important implications for Asia as a whole, and also for the world economy. Since the global financial crisis started in the United States, Europe has become trapped in debt morass. As a result, uncertainty about the world economy is increasing. China and Japan not only stand to gain economic benefits but also deepen mutual understanding by enhancing bilateral financial cooperation.
Q: Isn't the Japanese yen a competitor for the Chinese currency?
A: Japan is a developed country, while China is still a developing country. There is a large gap in the levels of economic development between the two countries. Since the two nations are in different stages of development, their economies are complementary to each other in many ways. That means bilateral cooperation offers a lot of benefits for both. There are, of course, areas where competition between the two countries is inevitable, but competition is not bad in itself. Fair competition according to the rules of the market is sure to help both improve their international competitiveness.
Misunderstandings and problems arise from insufficient communication. China and Japan are geographically close and also have deep cultural ties. We need to make greater efforts to understand each other better. Financial cooperation between the two countries is a model for such efforts. Through such cooperation, we will be able to deepen our mutual understanding further and expand relations between China and Japan as a whole.
Q: Specifically, what kind of cooperation do you have in mind?
A: Historically, we have been putting importance on Western financial markets. But both China and Japan need to disperse the risks by diversifying their respective investments. We are, of course, quite mindful of the fact that both the Japanese government and the Bank of Japan are loathe to see the yen rise further (due to investments from China), and taking care not to put upward pressure on the yen. (Partly because of that) China's investment in Japan remains small compared with the yen's presence in international markets.
Through financial cooperation according to market rules, we hope to bring our investment in Japan up to the level that is in line with the yen's international presence.
Japanese financial markets, be it the bond, stock or currency market, are all much larger and very important. We hope Japan will open itself more to Chinese capital.
Q: In what way would Japan benefit from this?
A: The U.S. government bond market is the largest in the world, followed by Japan's. Europe is also a large market if all the euro-zone countries are taken together. By country, however, China's bond market is bigger than that of Germany or France. By investing more in Chinese government bonds, Japan would be able to disperse the risks of investing its foreign reserves by diversifying the investment portfolio. It would also make good strategic sense. The renminbi is a currency with great potential. We have approved a quota of 65 billion yuan (780 billion yen, or $9.96 billion) for Japanese investment in Chinese government bonds, larger than the quota of any other country.
Q: A system is in place for direct trading between the yen and the yuan without using the dollar as an intermediate currency.
A: Trade between China and Japan is huge in volume. Expansion of settlements (of transactions between the two countries) in the yen or the yuan will reduce the (foreign exchange) risks and costs of fees involved for companies (of both countries). That will also create new businesses for banks in both countries.
Q: To promote bilateral financial cooperation, isn't it necessary to take steps to liberalize further cross-border transactions in the yuan? Nearly 20 years have passed since the government's announcement in 1993 that China will seek to make the yuan a convertible currency that can be readily bought or sold without government restrictions.
A: We don't have a specific timetable, but about three-quarters of yuan transactions are already liberalized, and we intend to continue reforming the currency market gradually.
When it faces a situation where reform, development and stability are mutually incompatible, China always stresses the importance of stability. This year, it is especially important for China to ensure "wen zhong qiu jin" (seeking progress in stability). We are putting the top priority on stability. Even so, we will keep expanding free market elements in currency trading and monetary policy through steps like widening the band in which the yuan can move against the dollar in a day or giving financial institutions greater freedom in setting interest rates on deposits and loans.
Q: As the flow of hot money (speculative investment funds) into China has slowed, surely it is no longer necessary for the Chinese government to be worried about the appreciation of the yuan?
A: The hot money flow into China has indeed dwindled. The country's foreign currency reserves have basically stabilized since autumn 2011 onward after torrid growth for the five years from 2006. Inflows and outflows of capital have become more or less balanced. Amid these trends, we believe, the yuan's exchange rates have come close to the point where supply and demand is in equilibrium. We will intervene in the currency market if we spot an extreme inflow or outflow of hot money.
Under ordinary conditions, however, the yuan's exchange rates are basically determined by supply and demand in the market.
Q: China is also pursuing greater financial cooperation with countries other than Japan. Since the global financial crisis triggered by the collapse of Lehman Brothers in 2008, Beijing has apparently been making steady efforts to internationalize the yuan, such as promoting trade settlements in the yuan or expanding quotas on foreign investments in yuan-denominated stocks and bonds in China.
A: China has also concluded currency swap agreements with 18 countries and regions.
Q: They include countries in a wide range of areas, from Asia and Europe to Latin America and Australia.
A: How much the yuan is used in international transactions is, of course, determined by the needs in the market. The primary importance of such a currency swap deal is in reducing uncertainty and diversifying and dispersing the global financial system.
Q: Aren't you concerned that such efforts to expand the use of currencies other than the dollar in international transactions, especially measures for internationalizing the yuan, may be in conflict with the current global financial regime dominated by the United States?
A: We think the global financial system dominated by the dollar will remain unchanged for some considerable length of time. If, however, China, Japan, European nations and emerging countries increase the use of their own currencies in trade and investment, that would help create a new, fairer international financial order.
Q: That's because the emergence of alternatives to the dollar would put pressure on U.S. policies, isn't it? If there is no alternative to the dollar, the United States would be able to print as many dollars as it wants and adopt any kind of financial policy without worrying about the effects on the world economy.
A: There is still a lot of uncertainty surrounding the sovereign debt crisis in Europe. The United States is likely to ease its monetary policy further, and the country is facing serious fiscal problems. Economic recovery remains slow in both the United States and Europe. As other countries want to reduce risks (linked to the dollar and the euro), they need to increase trade settlements and investments in their own currencies.
The shares of currencies other than the dollar and the euro (in international financial markets) are not large, but they have potential.
Q: The Chinese government has indeed been warning about various negative consequences of monetary easing by the United States, such as surge in the hot money flow into emerging countries. If the preponderance of the dollar becomes less overwhelming under the future global financial order, what will determine the power of currencies?
A: The factors (that determine the power of a currency) are the scale of the country's economy, the level of political stability in the country, its military power and its culture's ability to attract people and money. Political stability means predictability of its regime. Political uncertainty and unpredictability are negative factors (for the country's currency). A country's international status in terms of all these factors determines the level of international confidence in its currency and determines the overall power of its currency.
Q: What are your views about the future of the renminbi?
A: We have very realistic and sober views about our currency. China is still a developing country. Its economy has grown in size, but it will be some time before the yuan becomes a completely convertible currency and it will be much longer before it becomes a reserve currency. China will continue moving on the path of reform and opening toward a free market economy and the rule of law.
If a far larger number of people around the world come to put greater confidence in the renminbi, the currency will be able to contribute to stability in the international financial order. But many people in Japan appear to be concerned because China is developing at an extremely fast pace and its economic power is growing rapidly.
Q: There are certainly many Japanese who are feeling threatened (by China's growth).
A: As an individual in China, I have been thinking about this problem. What is important for China is to improve the stability, transparency and fairness of its regime by keeping itself on the path of reform and opening toward a free market economy and the rule of law. From my experience of teaching at a university, I also feel the need to provide more education to people in China to make them more cultured.
Why do people in China and Japan get into emotionally charged clashes so often? I think it is very important for people of the two countries to become more mature and able to interact with each other more rationally while developing mutual understanding and trust in the process. Policymakers and intellectuals, including university students of the two countries, need to build relations that enable them to act rationally and understand each other better without becoming emotional. I thought I had to start (my own efforts to promote such relations between the two countries) by doing specific things that I could do, even small acts. As a university professor, I'm accepting requests for interviews as much as possible to communicate the importance of the Sino-Japanese relations to many Japanese people. As a central banker, I'm promoting China's financial cooperation with Japan.
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Yi Gang, deputy governor of the People's Bank of China, was born in 1958 and obtained his Ph.D. in economics from the University of Illinois. After serving as a professor at Beijing University, he joined the People's Bank of China in 1997. He concurrently serves as director of the State Administration of Foreign Exchange, the post responsible for investing China's foreign reserves.
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