Direct trading between the Yen and the Rmb will aid exports by reducing settlement costs between China and Japan, according to industry leaders.

Banking experts tell GTR that the agreement signed last week between the two countries means importers and exporters will be able to settle quotes directly, instead of going through the US dollar, which will cut costs.

Vivek Gupta, head of trade and supply chain at ANZ Asia, says: “Fundamentally, does it make a difference for importers and exporters in the two countries? It does, purely because the cost reduces. It was an artificial cost, forcing the clients on both sides to go through the US dollar, an intermediary currency. This is effectively reducing transaction costs both at the importer and the exporter end.”

According to bankers, the move reflects the realisation that China and Japan are major trading partners, with annual trade flows worth over US$300bn. They expect the internationalisation of the Rmb to continue, with other countries working on direct trading agreements with China.

Michael Vrontamitis, head of product management, transaction banking at Standard Chartered in Singapore, tells GTR: “It’s just part of the natural course of things, a natural evolution to direct quotations and it will reduce costs. The Rmb is already the third largest currency for international trade after the dollar and the euro, so we are expecting this development to continue.

“It’s not a surprise and it’s something we expect to happen across multiple currencies. We’ve already seen it happening with several countries, like Malaysia, Korea, Russia, Thailand… It was announced at the London-Hong Kong forum a couple of weeks ago that there would also be direct trading with the UK [although no official agreement has been signed].”

Gupta adds that in the future, Japan could become an offshore Rmb market like Hong Kong, which would create opportunities for various sectors, including trade finance.

“Potentially, the next step could be to have an Rmb offshore market in Japan, similar to what we have in Hong Kong or Singapore to some extent, which could perhaps lead to further opportunities around a lot of businesses, including trade finance,” he tells GTR.

However, both bankers agree that Yen-Rmb direct trading is unlikely to challenge the US dollar’s dominance on global trade markets in the near future.

Vrontamitis believes Rmb trading is a natural option for companies to look at as the currency gets used more widely, but the US dollar will still dominate a large part of the market. “It’s still early days to know what percentage of China’s trade will be denominated in Rmb and how widely the Rmb is going to be used in the future,” he says.

Gupta adds: “The reality is that a huge quantum of the trade is dollar-denominated. It’s a large business between China and Japan, and China is the world’s largest economy, so yes, there will be a reduction in the use of settlements in US dollars, but trade between China and the US, Europe and Australia for example will continue to a great extent to be denominated in US dollars.”

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