Sam Ahmed, For The Straits Times

China's success in learning from Japan's missteps

Three ways China is consolidating its financial and political power in Asia.


"ASIA may accept the renminbi as an international currency but Japan and Korea never will. Not in your lifetime and certainly not in mine."

These words belonged to Japan's former vice-minister Eisuke Sakakibara, who was addressing a largely domestic banking crowd at the Asian Banker conference in Shanghai on Oct 24.

Fifteen years ago, the words of Mr Sakakibara - also known as "Mr Yen" - could cause a bank's trading floor to go into a frenzy, and the dollar/yen spot exchange rate to move by a few percentage points.

Unfortunately for both Japan and Mr Sakakibara, times have changed. His comments on Oct 24 did little but raise a few eyebrows among the bemused Chinese banking and government delegates.

The ascendance of China on the global economic and financial stage is throwing into relief Japan's short-lived position as Asia's top superpower.

Part of the reason is the Japanese never took long-term measures to sustain their regional supremacy. By contrast, the Chinese are executing three strategic steps to solidify their position.

Currency beyond borders

FIRST, China is embarking on a deliberate internationalisation of the renminbi, or yuan, by making explicit moves to promote the currency outside its borders.

It has started building offshore yuan hubs in Singapore, Malaysia, Hong Kong, Taiwan and Britain, in addition to having yuan clearing facilities in Germany, Russia and South Korea.

These economies also happen to be some of China's largest trading partners. With yuan liquidity pools growing around the world, it is only a matter of time before major trade flows between China and its partners shift to using offshore yuan.

Central banks have already started to include offshore yuan as a part of their reserve holdings. The move to internationalise the yuan is well under way.

Japan, on the other hand, was fairly apathetic about promoting its currency beyond its borders. It could have taken a three-pronged approach to ensure the yen was used as a trade currency, investment currency and eligible collateral in the massive US$700 trillion (S$903 trillion) bilateral over-the-counter derivatives markets.

Instead, the Japanese contented themselves with relying mainly on United States dollars to settle trades and as collateral for cross-border derivatives trading. Only about 40 per cent of Japan's exports and 20 per cent of its imports over the last three decades were denominated in yen, a low share for such a large economy.

For now, the yen is still more widely traded than the yuan.

But this reflects two fading trends: Japan's position as the second-largest economy in the world until it was overtaken by China recently, and the yen's popularity in the "carry trade", where traders would borrow yen at rock-bottom interest rates, convert it to higher-yielding currencies like the US dollar, earn interest on that currency, then swap it back into yen after a while.

In the meantime, the yuan has been the fastest-growing currency in the last three years. It has risen to become the seventh most used currency for international payments as of September, up from 20th position at the start of 2012, according to global financial transfers system SWIFT.

Financial nerve centre

THE second initiative China is taking to consolidate its position at Asia's helm is to push Shanghai as the region's financial centre.

The Chinese have built on the success of Shenzhen's special economic zones of the 1990s to create the Shanghai Free Trade Zone (FTZ) last year.

The idea was to experiment with liberalising interest rates, abolishing capital controls and allowing offshore yuan borrowing and foreign banks access to China's capital markets - measures that could be applied more widely if they prove successful.

The deputy director of the Shanghai FTZ, Mr Zhang Yong, is also welcoming freer flows of talent. He declared at the Asian Banker conference that "we would welcome foreign talent that would like to move to Shanghai to help us build the FTZ" and alluded to tax and housing incentives for foreigners.

Although the FTZ has gotten off to a slow start, it carries a promise of the eventual liberalisation of China's economy, with Shanghai poised to take a commanding regional role as a financial hub.

Again, Japan missed out in this area. In the 1990s, Tokyo stood uncontested as Asia's main finance hub, with most banks locating their regional headquarters in the capital. But by the mid-2000s, both Singapore and Hong Kong began aggressive campaigns to compete for the title of Asia's financial hub.

To counter this, the Japanese could have lowered taxes and immigration barriers.

Instead, their long-held fears of "opening the flood gates" and risking the dilution of the core Japanese population and their values prevailed over pragmatic economic interests. By 2007, the bulk of the trading desks and other banking operations had moved south.

Asian focus

FINALLY, China is consciously courting its neighbours where Japan made the mistake of focusing too much on the West.

Both Japan's foreign and investment policies were engineered towards maintaining very close ties with the US. They never envisaged the rapid rise of China and its potential influence on the region, and thus failed to invest in a strategic relationship with China that would have provided dividends today.

China, by contrast, has taken the lead in many regional initiatives as it seeks to counterbalance the influence of the West.

Perhaps the most ambitious of these is the Asian Infrastructure Investment Bank, a China-led development bank aimed at addressing the infrastructural needs in the region. The institution, launched last month, is seen as a direct challenge to the authority of the World Bank and Asian Development Bank.

It is increasingly evident that as China's influence in Asia grows and it assumes a regional leadership role, the Japanese could end up being marginalised and isolated from a growing Asia - unless they take a more proactive stance in reaching out to their neighbours.

Without China and Asia, Japan on its own cannot simply rely on the backing of the US, a nation fatigued with two recent wars and the aftermath of a major financial crisis, to secure a leading position in Asia.

During the morning coffee break at the Asian Banker conference, I asked a senior Chinese banking official what he thought of Mr Sakakibara's provocative comments.

He replied: "Sorry, but I was engaged on a conference call with our Singapore office."

The statement sums it up: China's engagement with Asia as a regional leader has begun and a disgruntled Japan is the least of its worries.

The writer is founder and managing director of Deriv Asia, a management consultancy based in Singapore.