Bonds to improve Tokyo, Beijing ties

TOKYO - Agence France-Presse

The 492-meter-tall Shanghai World Financial Center (C), the tallest building in China, stands among other high-rise buildings in Shanghai’s Pudong District. Japanese real estate tycoon Minoru Mori, who died last week, built the finance center. AP photo

Japan said yesterday it had won approval from Beijing to buy Chinese government bonds for the first time, in a move aimed at binding Asia’s two biggest economies and traditional rivals closer together.

China does not allow investors to freely purchase its debt, requiring official approval instead. But analysts said it appeared to be the first time a major economy had bought government bonds directly from Beijing.

The green light for Tokyo points to a new closeness on the economic front, although the two countries remain at odds on a host of historical and territorial questions.

Japan was cleared to buy Chinese government bond issues worth $10.3 billion, Finance Minister Jun Azumi said in Tokyo.

“I think this is an appropriate amount for the initial purpose of strengthening bilateral economic ties,” he said.

The announcement came the same day Japan confirmed it may bring a case against China at the World Trade Organization over restrictions on rare earth exports, as part of a reportedly joint complaint with the U.S. and European Union.

China is the world’s largest producer of rare earths -- 17 elements critical to manufacturing a range of high-tech products from iPods to missiles -- and its moves to dictate production and exports have raised a global outcry.

“We are carefully considering the matter,” said Chief Cabinet Secretary Osamu Fujimura, the Japanese government’s top spokesman, referring to the trade complaint.

Japan and China had initially agreed to the bonds purchase in December, subject to regulatory approval, as part of a wider deal aimed at stabilizing Asian financial markets amid global economic turmoil, Azumi said.

Under the deal, Beijing gave the nod for Tokyo to buy 65 billion yuan ($10.3 billion) in Chinese public debt, but completing the purchase “will take several months” because of administrative requirements, he said.

China has already been investing in Japanese government debt in an apparent bid to diversify some of its currency reserves -the world’s biggest- into yen amid concerns about Europe’s debt crisis and prospects for the U.S. dollar.

The December deal, following talks between the Japanese and Chinese premiers in Beijing, aimed to include “supporting sound development of the yen-denominated and the yuan-denominated bond markets”.

But no further details of the Japanese purchase were given.

The Asian economic powers also agreed to promote the use of their currencies in bilateral transactions -- such as yuan-denominated foreign direct investment by Japanese companies in China -- to reduce foreign exchange risks.

Despite frequent spats over animosities from Japan’s 1930s invasion of China and lingering territorial claims, China is Japan’s largest trading partner. But about 60 percent of their mutual trade is denominated in US dollars.

Strong symbolic value
Alaistair Chan, China economist with Moody’s Australia, said the bond purchase had strong symbolic value as Beijing seeks to encourage international use of the yuan currency.

“The approval is another small step in the opening of China’s financial markets,” he said.

“Although it does not mean much at this stage, given the small allocation -- $10.3 billion -- and the fact that China is able to fund all its debts domestically, having Japan purchase Chinese debt is a big signal of approval for China.

“It shows that its debt is secure and safe and a reliable investment.”

Akio Takahara, professor of Chinese politics at the University of Tokyo, agreed that the bond purchase was “symbolically important, in a sense that Japan showed its willingness to support Chinese economic growth”.

“But I don’t think the size of the purchase will expand very quickly to match Japan’s heavy purchase of U.S. government bonds, as the Chinese yuan has not yet acquired the position of an international currency,” he said.

“And of course, there are risks in the future of the Chinese economy,” he added, with recent data pointing to a slowdown in China’s economic growth in 2012 from the blistering pace of recent years.