Seoul has bowed to intimidation by Trump while China is plagued by the Trump trade offensive
It is overly naive to consider that the purpose of the May 9 meeting between Prime Minister Shinzo Abe, Chinese Premier Li Keiqiang, and South Korean President Moon Jae-in in Tokyo was primarily to discuss ways to cope with threats from North Korea.
The real intention of the Chinese and South Korean leaders was to pave the way for currency swap agreements with Japan. Both China and South Korea are itching to get their hands on Japan’s yen funds, according to analysts.
What is interesting in this connection is the May 7 editorial in the online Japanese-language edition of Hankyung (The Korean Economic Daily), one of South Korea’s leading newspapers, under the title, “Atmosphere Being Fomented in Favor of Resuming South Korea-Japan Currency Swap Deal Talks.”
Japan has so far refused to sit at the negotiating table on a bilateral currency swap agreement because of Seoul’s failure to honor its agreement with Tokyo to bring the long-standing wartime “comfort women” issue to an irreversible end. However, the Hankyung editorial noted heightened expectations that Japan could have a change of heart and possibly “assume a positive attitude toward reopening negotiations for a currency swap line” between the two countries.
The editorial speculates that a “surge in concerns in Japan over possible ‘Japan-passing’ moves that would result from the April 27 inter-Korean summit talks and the forthcoming summit between the United States and North Korea” would lead Japan to a currency swap deal.
It seems that the newspaper editors have taken it for granted that Japan has a fear of being cut out of the loop on future developments on the Korean Peninsula and, as a result, would become intent on improving the Tokyo-Seoul relationship. The editorial’s hilariously speculative argument is presumably due to South Korea’s craving for access to yen funds from the Japanese monetary authorities.
In October 2017, Seoul managed to solicit a favor from Beijing to conclude a currency swap line between the Chinese renminbi and the South Korean won. The renminbi (also called the Chinese yuan), however, has been under the tight control of Beijing’s monetary authorities and therefore tends to be inconvenient as a tool for deals involving foreign exchange settlements. The Japanese yen, on the other hand, can easily be exchanged with such key currencies as the U.S. dollar and the euro.
A major factor behind South Korea’s strong desire for dragging Japan into a currency swap scheme stems from the trade policy being pursued by the administration of United States President Donald Trump. Having succumbed to Trump’s intimidation to scrap the U.S.-South Korea free trade agreement, Seoul has reluctantly agreed to put a currency provision into the bilateral trade accord.
Because of the currency provision, the South Korean government will be unable to intervene in the country’s foreign exchange market. Given that the South Korean economy depends heavily on export revenues and capital from overseas, Seoul urgently needs to ensure there are arrangements in place to accommodate foreign currencies and to enable itself to cope with a shortfall in dollar reserves in the event of a financial emergency.
China, too, has been racking its brain over the Trump offensive. Trump has been reproaching Beijing for China’s massive trade surplus with the United States and alleged infringements of intellectual property rights. For these, Washington has threatened to apply economic sanctions in the form of high tariffs on a wide range of Chinese products.
China has also been pressed hard to liberalize its financial market, which has been rigidly regulated by the authorities, to make it more open to foreign competition. Moreover, China’s domestic enterprises and investors have been shifting colossal amounts of cash abroad by circumventing a maze of regulatory hurdles.
The Chinese economy would be put in a state of upheaval should a U.S.-China trade war break out, accelerating the flight of capital overseas and aggravating the risk of China plunging into a currency crisis.
Shown above is a diagram with China’s year-on-year foreign exchange reserve fluctuations in comparison with its direct foreign investment. The forex reserves seem to have picked up gradually from 2017, and the differences between forex reserves and direct foreign investment are markedly narrow.
This means China’s forex reserves have a structure of being shored up by funds from abroad through direct foreign investment. That means the reserves have been underpinned by foreign capital. At the same time, China’s foreign exchange reserves are at risk of being hollowed out in the event of a tapering off of the influx of cash from abroad or if a massive flight of capital takes place.
China’s huge trade surplus, which run approximately US$420 billion annually (equivalent to about ¥45.74 trillion) is of course a major fountain of its forex reserves. The U.S., which accounts for a majority of China’s overall trade surplus, is pressuring Beijing, however, to drastically slash its trade surplus with the United States by $200 billion a year. Therefore, the outward appearance of China’s forex reserves topping the $3-trillion mark is quite superficial, falling far short of providing Beijing the rock solid financial base it needs to weather any future global financial crisis.
The safety net for China’s economic reinvigoration in that scenario would most likely be cash coming from Japan.
In a bid to reinstate the Japan-China currency swap pact—which expired in 2013 mainly because of the territorial row over the Senkaku Islands in Okinawa Prefecture—Beijing is taking the opportunity to make full use of Premier Li’s visit to Japan, among other tactics, in an all-out effort to appease Tokyo behind the scenes.
Hideo Tamura is a special commentary writer of The Sankei Shimbun.
(Click here to read the original article in Japanese.)