Japan, China sign US$3 billion yen-yuan swap agreement

Japan, China sign US$3 billion yen-yuan swap agreement

Yoko Nishikawa, Reuters, Tokyo

Japan and China on Thursday signed a yen-yuan swap agreement as
part of an Asian-wide currency safety net designed to boost
regional cooperation and ward off future financial crises.

The Japan-China scheme, however, will be primarily symbolic
because neither Japan nor China are likely to face liquidity or
balance of payment crises in short term.

The scheme, worth US$3 billion, is the sixth such pact under
the Chiang Mai Initiative (CMI), which aims to forge closer
monetary ties by creating a network of central bank currency
swaps among the 10-member Association of Southeast Asian Nations
plus Japan, China and South Korea (ASEAN+3).

The idea of the swaps is to make foreign-exchange reserves
available at short notice to a member of the group whose currency
comes under sudden speculative attack, as happened to Thailand in
1997 when the baht came under severe selling pressure.

Chinese central bank governor Dai Xianglong, speaking to a
small group of journalists through a Japanese interpreter, said
it was hard to imagine a situation in which China and Japan would
need to use the swap scheme.

Japan and China are the world's two biggest holders of
external reserves.

Japan's foreign reserves, the world's biggest, stood at $403.5
billion at the end of February, while China's has more than $200
billion in foreign reserves.

Moreover, the yuan is not convertible on the capital account,
largely reducing China's vulnerability to the sort of speculative
attacks for which the CMI is designed.

But Japanese officials consider China's participation in the
CMI important for promoting regional cooperation after Beijing
relaxed its opposition to a Japanese call in 1997 for an Asian
Monetary Fund, an idea fiercely opposed by the United States.

Hayami said earlier this week that the deal would enhance
cooperation between the two central banks in the year that also
marks the 30th anniversary of the restoration of diplomatic ties
between Tokyo and Beijing.

Japan is involved in four of the five bilateral CMI swaps
signed so far -- with South Korea ($2 billion), Thailand ($3
billion), the Philippines ($3 billion) and Malaysia ($1 billion).

The fifth, worth $2 billion, was signed in December between
China and Thailand, and Dai said China would also set up a pact
with South Korea.

Unlike other bilateral swap deals, the China-Japan scheme will
be denominated in yen rather than dollars. Japanese officials
have said that was China's choice because Beijing already has
enough dollar-denominated foreign reserves.

Japan has only one other yen-denominated currency swap line,
with the European Central Bank, but that facility is mainly for
currency intervention purposes and was used in September 2000
when the ECB and the BOJ intervened to prop up the euro.

Japanese officials visited Singapore several weeks ago to
negotiate a currency swap deal under the CMI umbrella. Tokyo, a
driving force for the network, has also expressed interest in
negotiating a deal with Indonesia in the future.

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand and Vietnam.