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Japan And China: BFF?

Following six weeks of big pro-US moves by Japan, Tokyo is also signing deals with China.  As the Wall Street Journal reports, last week saw a package of economic agreements that could help ease the Chinese yuan into a more international role and make life easier for Japanese companies doing business in China.

Declinists will want to trumpet these agreements as yet another milestone on the road of American decline.  They will see them as evidence that China’s economic power is reshaping Asia and also as further proof of the erosion of the dollar’s international role.  (The agreements will enable Chinese-Japanese trade to be settled in the currencies of these two countries without first converting the funds into dollars.)

But context matters.  The US actually supports these agreements.  While a few American banks may lose some foreign exchange conversion fees. this process represents an important step in internationalizing the Chinese yuan.  The more the yuan is used in international trade, many believe, the more its exchange rate will reflect market forces and the harder it will be for China to keep the yuan artificially undervalued.

Moreover, as Via Meadia readers know, the US goal is not to isolate and contain China.  It is to deter China from aggressively pushing for regional hegemony while integrating it ever more tightly into the international economic system.  Rather than trying to link India, Japan, Australia and the other Asian countries into a tight anti-China alliance, the US wants to promote security cooperation among these countries while simultaneously promoting economic integration in Asia and better relations among all Asian countries, including China.

The new Japan-China agreements fit this pattern exactly and China’s willingness to move forward on economic cooperation with Japan despite Japan’s more aggressive and pro-US stance on a number of contentious issues suggests that at least some factions in China’s government are ready to work within the kind of Asia America hopes to help build.

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  • Luke Lea

    Nicely put. Now if China will just go along.

  • Jacksonian Libertarian

    I agree, our nefarious plan to lure Asia into a close economic relationship, is spiking the violent tendencies of the authoritarian nations there. It is difficult to rattle the saber and threaten your biggest and best customers. ha, ha, we win

  • Mark

    What I think many miss -WRM among them, it seems -is that the yuan is probably ‘fairly valued’ or nearly there. In fact, in 2012 it may undergo some depreciation, though it’s anyone’s guess as to the extent (it could be mild or severe).
    When Obama spoke about China’s unfair trade practices in Hawaii a few months ago, he mentioned only the currency level, because that makes the best sound-bite, but it is very likely all of China’s other unfair trade practices will be emphasized in negotiations because the currency level -right now -is least among them.
    China has made internationalization of the yuan a priority, with mixed results. It was a popular investment vehicle until the yuan’s appreciation stopped several months ago. The Chinese have been able to persuade or strong-arm some trading partners into making it part of their reserves, though I doubt this was their first choice and they would not have done so unless asked and probably offered some quid-pro-quo. Japan’s commitment, as much press as it is getting, is very small.

    • Walter Russell Mead

      @Mark: If I wished to express a view about whether the yuan is undervalued, I would do so. I was explaining the US government view, not expressing my own.

  • teapartydoc

    They’re spreading out the risk, and time is short. They’d better do it as fast as they can.

  • Ampontan

    It might come as a shock to the US government and its spokesmen, but it’s not always about them.

    * China has been Japan’s largest trading partner for some time now.

    * China is the country with the most Japanese overseas subsidiaries.

    * 70,000 Chinese students study in Japan

    * There is growing interest in Japan in a China-South Korea-Japan free trade agreement, as a possible alternative to the TPP (People overseas are understandably concerned about the Americans’ lack of interest in making concessions in negotiations while demanding the same from others.)

    Direct yen-yuan transactions are only natural and long overdue.

    Japan has had “diplomatic relations” with China for 1,500 years. They’ve poured billions in ODA into the country over the last 40 years. They can manage without American help.

  • Rodney Murdock

    China has been making subtle but definitive moves to make the yuan an international currency for a long time.

    China it should be noted is the largest gold producer and on track to be the largest gold consumer. This is not an accident. The American political rhetoric of currency manipulation should stop. If China allowed a floating yuan and made exact the amount of gold they have then the yuan goes beserk and the dollar crashes. This will not hurt the Chinese as it gives them increased buying power and they get to use their devauled dollars to pay the long term contracts that have already been written, in dollars…

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