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China Ends the Year Building Good Relationships with its Neighbors

By:
Barry Norman
Updated: Jan 1, 2011, 00:00 UTC

As the year draws to an end, China was the only country expected to make market news, with a lot of data being released this week. It seems as though

China Ends the Year Building Good Relationships with its Neighbors

As the year draws to an end, China was the only country expected to make market news, with a lot of data being released this week. It seems as though China has decided to start the year off with new and improved relationships with its Asian neighbors. Earlier today, China and Japan agreed to develop a currency conversion between the Yuan and the Yen, without going via the US dollar.

China announced a 70 billion Yuan ($11 billion) currency swap agreement with Thailand as part of a plan outlined in October to promote the use of the Yuan in the Association of Southeast Asian Nations and establish free trade zones.

Central banks from Thailand to Nigeria plan to start buying Yuan assets as slowing global growth has capped interest rates in the U.S. and Europe.

The move by China and Japan to strengthen market cooperation “benefits the ease of trade and investments between the two countries,” Chinese Foreign Ministry spokesman Hong Lei said today in Beijing. “It strengthens the region’s ability to protect against risks and deal with challenges.”

The Yuan traded in Hong Kong’s offshore market gained 0.5 percent offshore last week and touched 6.3324 per dollar, the strongest level since trading started in July 2010. Its discount to the exchange rate in Shanghai narrowed to 0.1 percent, from a record 1.9 percent on Sept. 23.

The Yuan gained 0.05 percent in Shanghai to 6.3330 per dollar today and was little changed at 6.3450 in Hong Kong. It strengthened 4.3 percent this year, the best-performing Asian currency excluding the Yen. The currency is allowed to trade 0.5 percent on either side of that rate. The Yuan is a denomination of the renminbi.

Japan exported 10.8 trillion Yen to China in the year through November, and imported 12 trillion Yen, according to Ministry of Finance data. The deficit with China widened to 1.2 trillion Yen, from 418 billion Yen in January-to-November 2010. About 60 percent of the trade transactions are settled in dollars, according to Japan’s Finance Ministry.

Finance Minister Jun Azumi said Dec. 20 buying of Chinese bonds would help reveal more information about financial markets in China. Noda said in September 2010, when he was finance minister that Japan should be able to invest in China given that its neighbor buys Japanese debt. Japan holds $1.3 trillion of foreign-currency reserves; the world’s second largest after China’s $3.2 trillion.

Investing in Chinese debt has become easier for central banks as issuance of Yuan-denominated bonds in Hong Kong more than tripled to 112 billion Yuan ($18 billion) this year and institutions were granted quotas to invest onshore. Japan will start to buy “a small amount” of China’s bonds, a Japanese government official said on condition of anonymity because of the ministry’s policy, without elaborating.

China sold the second-biggest net amount of Japanese debt on record in October as the Yen headed for a postwar high against the dollar and benchmark yields approached their lowest levels in a year. It cut Japanese debt by 853 billion Yen, Japan’s Ministry of Finance said on Dec. 8.

Perhaps, China realizes that in order to be a good trading partner they also have to be a good neighbor, or perhaps, it is capitalism plain and simple, China protecting their income, exports and economic growth. Any reason, it seems that China is moving more to a friendly nation status.

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