Japan, China Sign $3-Bn Yen-yuan Swap Deal To Avert Future Crises

["Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>]

The Financial Express

March 29, 2002

MONEY & BANKING

Japan, China Sign $3-Bn Yen-yuan Swap Deal To Avert Future Crises


Tokyo, March 28:  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 $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-strong Association of
South East 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.
- Reuters

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