What bilateral agreements do markets accept?

Germany sold 4.06 billion euros of the bonds on the 4th of January with the average yield of 1.93% on 10 year government bonds. France sold 7.9 billion euros of bonds on the 5th of January with the average yield of 3.29% on 10 year government bonds. It is supposed that Italy’s and Spain’s borrowing in the markets this week could be facilitated as well due to the ECB’s injected liquidity through 3-year refinancing operation worth of 500 billion euros and expectations that the ECB’s Governing Council will cut interest rates on the January 12 meeting. However, despite the European sovereign debt crisis and broken markets’ confidence, China, Japan and South Korea move forward to closer financial cooperation.


After the Asian financial crisis in 1997-98, the leaders of East Asian Countries agreed to promote the Chiang Mai Initiative (CMI) which aimed to create a network of bilateral swap arrangements (BSAs) among ASEAN+3 countries to tackle short-term liquidity issues and to supplement the existing international financial arrangements.

Under the above mentioned initiative, the $120 billion crisis fund was established. In 2001 Finance ministers of ASEAN+3 agreed to exchange data on capital flows bilaterally on a voluntary basis in order the effective policy dialogue was facilitated and in 2005 Finance ministers agreed to enhance the effectiveness of the CMI by (1) integrating and enhancing the ASEAN+3 economic surveillance into the CMI framework, (2) clearly defining the swap activation process and the adoption of a collective decision-making mechanism, (3) significantly increasing the size of swaps, and (4) improving the drawdown mechanism. Moreover, developed bond markets under the same initiative reduced the dependence on short-term foreign currency-denominated financing and helped to mitigate the vulnerability caused by the currency and maturity mismatches aroused due to the volatile short term capital movements.

Japanese Prime Minister Yoshihiko Noda visited the Chinese Premier Wen Jiobao on the 25th of December in 2011 and discussed a bilateral package of financial agreements. According to the Bloomberg, Japanese government-backed entity will sell yuan-denominated bonds in China to deepen China’s domestic capital markets and other measures will be applied to facilitate the trade among Chinese and Japanese companies in their domestic currencies. These actions should reduce trade costs as measures are designed to eliminate the usage of the US dollars in exchange of currencies. Moreover, those agreements will ease the entrenchment of the Chinese yuan as a reserve currency.

However, China’s one-way determined exchange rate’s policy puzzles the most. If Japan, South Korea, US, European and other trade partners decide to set the domestic currencies and China’s yuan exchange rates then who will be right.