China has taken a key step towards making the yuan or renminbi a truly global currency.
China has announced that direct trading of the yuan against the Japanese yen will begin this Friday. The trading marks the first time that China has allowed a major currency other than the US dollar to be traded directly against the yuan.
The move is expected to boost trade between the two leading Asian economies in the wake of the Eurozone's economic downturn. More important, it will promote greater internationalization of the yuan.
Analysts said a direct yuan-yen exchange rate will help business firms mitigate risks brought by a fluctuating US dollar and reduce exchange losses for Chinese and Japanese companies.
The People's Bank of China said that as part of the efforts between China and Japan to strengthen cooperation in developing the financial market, the move is as an important means of promoting direct yuan-yen trading.
The central parity rate of the yuan against the yen will be based on the average price of offers made by registered dealers before the opening of the market each business day.
The yuan is currently allowed to be traded against eight other currencies on the market. These currencies are the Euro, British pound, Hong Kong dollar, Japanese yen, Malaysian ringgit, Russian ruble, Australian dollar and Canadian dollar.
The new system, however, doesn't allow free convertibility but permits simplified transactions and lower transaction costs.
Direct yuan-yen trading shows the important role of the offshore RMB market in Japan. Analysts expect the system to be expanded to more currencies, including the Euro and British pound.
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