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Currency deal ushers in a new era

By Wang Xiaotian and Gao Changxin (China Daily)

06:53, May 31, 2012

China and Japan will start direct trading of their currencies on Friday in a move to boost trade ties between Asia's two biggest economies.

This will be the first time that China has allowed a major currency, apart from the US dollar, to trade directly with the yuan.

Direct trading of the currencies means that the two countries will not be using the dollar as an intermediary in setting exchange rates.

The China Foreign Exchange Trade System, the central bank's trading arm, announced the move on Tuesday. It said that a system to manage the direct trade of the currencies would be established.

This means that both countries will abandon the existing system, which calculates yen-yuan rates on the basis of their respective values against the dollar.

Yuan-yen trading will be processed on the Tokyo and Shanghai markets, and the daily yen-yuan central parity rate will be formulated by the weighted average of prices given by market makers, it said.

The move came after Japan said in December that it would become the first developed economy to hold yuan-denominated bonds as reserve assets. Tokyo got approval to buy about $10 billion of Chinese bonds in March.

Bank of China, a major international yuan clearing and settlement bank, said in a statement on Tuesday that it has applied for direct market maker qualifications. It also said that it had completed the risk monitoring and system preparation to guarantee sufficient liquidity in the inter-bank market for trading.

"In the future the exchange rate of the yuan against the yen will be determined directly by market demand and supply," it said.

The People's Bank of China, the central bank, said on Tuesday it "actively" supports the direct trading.

"This is an important step in implementing the joint statement of the leaders of the two countries on strengthening cooperation between China and Japan in developing financial markets and mutually promoting direct trading between the two currencies based on market principle," it said in a statement posted on its official website.

Direct trading will result in the establishment of a direct exchange rate between the two currencies, it said.

"This will help lower currency conversion costs for economic entities, facilitate the use of the yuan and Japanese yen in bilateral trade and investment, promote financial cooperation and enhance economic and financial ties between the two countries."

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