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 & 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.
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.
Japanese Prime Minister Shinzo Abe and Chinese Premier Li Keqiang also signed a broad range of other financial agreements, including a US$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.