China and Japan find common ground

Francesco Sisci, 01/05/12

BEIJING - As with all important occasions, it does not matter so much who was there, but who was missing. On December 28, among thousands of North Korean mourners parading past the body of the deceased Dear Leader Kim Jong-il to bid a final farewell, what stood out was the absence of top dignitaries from neighboring countries and those concerned about the future of Pyongyang.

Significantly, in the same hours, on Christmas Day and Boxing Day in Beijing, China and Japan, North Korea's two most important neighbors, signed an important monetary agreement.

Japanese Prime Minister Yoshihiko Noda and his Chinese counterpart Wen Jiabao along with Chinese President Hu Jintao put aside their bitter disputes over the maritime border of the Diaoyu/Senkaku Islands and the surrounding gas fields, and they launched a major monetary framework agreement.

The two countries clinched a deal for direct exchange of Chinese yuan against the Japanese yen. The yuan is not fully convertible, and previously trade took place through US dollars. Furthermore, the two countries have agreed to let their currencies appreciate against the dollar and the euro. Finally, Japan has indicated its willingness to buy Chinese debt, even if Beijing does not need to unload it.

All these elements are extremely important in the short term and long term. In the short term, appreciation of the currencies of the second- and third-largest economies in the world (China and Japan) means that efforts by the two countries to help America and Europe will now be easier. Exports from China and Japan to the United States and Europe will be more expensive and this should in turn push United States domestic industry.

Compensating for the damage to the two countries' exports, which had previously offered an excellent value for the money, the shift should help with imports of foreign products into the two countries and to boost domestic demand.

In the longer term, the agreement reinforces the international role of the yuan and it can be a very important step toward the free exchange of Chinese currency.

China already has currency-swap agreements with a dozen countries, but Japan is its second-largest trading partner, so the overall impact of this agreement is much more important. At this point, only an exchange agreement with the euro area is missing to affirm the new global position of the yuan.

This can mean a step backward for the role of the dollar in the global economy. But Washington has been pressing for the revaluation of the yuan, and that would not happen without lifting the yuan profile. In any case the yuan fluctuates with a crawling peg with the US dollar, so it is still firmly linked with the American currency.

There is, however, a political aspect to this economic story. The agreement could closely bind the destinies of China and Japan to each other, despite the tensions that have accumulated in recent months. Indeed, the bilateral summit had been postponed. It was originally planned for December 12-13 and it could have revolved on unimportant issues.

The death of Kim Jong-il seems to have been the catalyst for improving the bilateral relationship. For parallel reasons, China and Japan are both worried that chaos could develop in the region following the death of Kim.

Both countries are frightened by the prospect of an out-of-control North Korea that pulls the area into a black hole of tension. But they are also worried about the prospect of a reunified Korea, which could become very nationalistic and rekindle political and territorial disputes with China and Japan, both home to significant a Korean minority. China seemed able to manage so far smoothly the Kim's power transition, as in the same hours Kim Jong-il was declared dead, Pyongyang announced finally it would give up its uranium nuclear program, something that for years had been the stumbling block in the progress of peace talks on the Korean peninsula. The double announcement, on Kim's demise and on the uranium program, appears to have been managed with Beijing's help.

The economic agreement can then become, as often happens with strategies in this part of the world, a platform for political convergence to address tensions related to the new situation in the Korean peninsula. A reconciliation of the two countries in practice means finding a way to follow and also hopefully guide the otherwise potentially dangerous developments on the Korean Peninsula.

Here both are operating under the watchful eye of the American diplomacy, which in very prickly and dangerous North Korea it has arguably scored its biggest success in the past decade. Tension there has been contained, Pyongyang's regional influence has been reduced, and although there has been no final solution for North Korea there have been no major explosions of tensions, fallout or spread of negative results, as happened because of poor policy choices in Iraq and Afghanistan.

It could be that in the future, a new regional order could be built around North Korea and China could find in Japan and America important political and strategic partners. This could go hand in hand with developments in Taiwan, the island de facto independent formally part of one China, where America in the past decade has been careful to curb pulls for unilateral declaration of independence that would irritate Beijing.

In more than a way the present success of the Chinese policy on Taiwan (see Hu Jintao the real Taiwan election victor Asia Times Online, December 21, 2011) has been riding on US cooperation on restraining independence movements irksome to the Chinese leadership.

With North Korea and Taiwan the US could be seeking a new path of collaboration with China and excluding a strategy of encirclement rising from the recent tensions in the South China Sea and the eastern sea borders with Japan and South Korea.

Conversely, if things go wrong with North Korea in the coming weeks and months, we could expect an upsurge in political and economic tensions on a global scale, involving possibly also Taiwan, the South China sea and in the east.

Francesco Sisci is a columnist for the Italian daily Il Sole 24 Ore and can be reached at fsisci@gmail.com

(Copyright 2011 Francesco Sisci.)

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