China may be courting Japan to cooperate with belt and road to allay controversy after yuan clearing deal

19-Jul-2019 Intellasia | South China Morning Post | 6:02 AM Print This Post

China’s decision last month to allow a Japanese bank to clear transactions valued in yuan raises the prospects of increased economic cooperation between the two countries, especially as China seeks to involve new countries in the Belt and Road Initiative in an attempt to fend off criticisms of its projects, analysts said.

The People’s Bank of China last month named MUFG Bank as the first yuan clearing bank in Japan, and only the second non-Chinese bank after JPMorgan last year, to be allowed to clear and settle yuan-denominated transactions.

The selection of Japan’s largest bank to clear yuan transactions is the latest step in the warming of economic relations, and comes as Beijing makes changes to its belt and road strategy to improve lending practices and the quality of the infrastructure projects that connect Asia with Africa and Europe. The Belt and Road Initiative is President Xi Jinping’s plan to grow global trade.

Japan has not formally joined the initiative amid controversy over the skyrocketing costs of many of its projects. It is also viewed by many as a soft power play by China, as it looks to increase its sphere of influence through Europe and Asia.

 (South China Morning Post)

(South China Morning Post)

However, if Japan begins to cooperate with the initiative and is able to influence the quality of investments and reduce funding risks, China could potentially allay such criticism, according to Tobias Harris, senior vice-president at global CEO consulting and advisory firm Teneo.

In the past seven years, Japan has bolstered its financial commitments to investment throughout Asia and has articulated new principles for investment that are now seen as the “gold standard” for the region, according to Harris.

“Beijing faced a backlash to the belt and road, [and] saw infrastructure cooperation with Japan as a possible means of improving the initiative’s image,” said Harris, who served on the staff of Keiichiro Asao, a former member of the upper house of the Japanese legislature and shadow foreign minister for the Democratic Party of Japan. “Both governments are looking for new areas of cooperation, including joint infrastructure investment opportunities in third [party] countries.”

Japan and China last year started moving ahead with plans to establish a new public-private committee to spearhead their joint efforts on overseas infrastructure projects, although the Belt and Road Initiative was not specifically mentioned. Building railways in Thailand is reportedly one possible type of project that China and Japan could undertake together.

“Beijing faced a backlash to the belt and road, [and] saw infrastructure cooperation with Japan as a possible means of improving the initiative’s image

Tobias Harris

Japanese prime minister Shinzo Abe and Chinese Premier Li Keqiang also signed a broad range of other financial agreements, including a $30 billion bilateral currency swap pact, in Tokyo in October, raising the prospect of further economic cooperation.

And in early July, China Investment Corporation, China’s sovereign wealth fund, and major Japanese financial institutions, including Nomura Securities, pledged to promote cooperation between their two governments, develop industries that would be mutually beneficial, and strengthen their collaboration in financial investments.

“Abe himself isn’t necessarily implacably opposed to China, but he wants to deal with China from a position of strength and does not want to as he accused the former Democratic Party of Japan of doing be in a position of simply giving in to Beijing’s demands,” Teneo’s Harris added. “I think Abe saw political benefits in being seen as a peacemaker with Beijing, even if there are significant obstacles to deeper cooperation.”

President Xi’s emphasis during the second belt and road forum in April on creating green and sustainable projects marked a turning point for China to show a demonstrable effort to follow best international practices.

“The [Belt and Road Initiative] could progress at a slower pace in coming years. Most attention has been on the risk to participating countries, but perhaps the country faced with the greatest risk is China,” said Steve Cochrane, chief economist at Moody’s Analytics.

Before MUFG Bank was granted the yuan clearing license, Japanese banks had to make cumbersome yuan settlement transactions through their Chinese subsidiaries or with Chinese banks in offshore yuan centres.

As a result, Japan’s share of total yuan settlements outside mainland China was only 0.78 per cent, below the top offshore yuan centres of Hong Kong (75.3 per cent), London (6.08 per cent) and Singapore (3.36 per cent).

Additionally, a host of factors suggest significant obstacles to deeper political cooperation between the two countries. Ties between China and Japan have long been plagued by wartime grievances and competing sovereignty claims over islands in the East China Sea, while being on opposite sides in a range of other regional security issues.

From a political and governmental standpoint, Japan won’t rely on China. Ultimately Japan is close to the US and it would not want to upset the US

Terence Chong

“From a political and governmental standpoint, Japan won’t rely on China. Ultimately Japan is close to the US and it would not want to upset the US,” said professor Terence Chong from the department of economics at the Chinese University in Hong Kong.

But for Tokyo, further measured steps on economic cooperation with Beijing make sense. For instance, a boom in Chinese tourists visiting Japan may help appease Japanese businesses after rising tensions that prevailed in the early years of Abe’s tenure. Japanese tourism data shows the number of visitors from China surged from 1.3 million in 2013 to 8.4 million last year.

“[China] is a big market for Japan, which it cannot afford to lose,” Chong added. “Having the ability to settle in yuan would be beneficial to Japan because it would make it easier for rich Chinese to go to Japan to spend money.”



Category: China

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