Economic realpolitik brings Asia’s big guns together

Nothing beats a potential financial crisis to bring geopolitical rivals together. This dynamic was on full display in Beijing Friday when the premiers of China and Japan joined hands on a US$30 billion currency swap, a yuan clearing bank and business deals worth billions.

The steps agreed upon by Chinese Prime Minister Li Keqiang and Japanese Prime Minister Shinzo Abe were aimed at spurring business activity between Asia’s top two economies and maintaining financial stability in the region. The timing could not be more significant.

The links come just as US President Donald Trump’s trade war throws China’s debt-fueled economy off balance and imperils Japan’s six-year effort to defeat deflation.

And the moves are bilaterally significant, in that they appear to override the historical, ideological and territorial disputes that so often dominate relations between Asia’s two leading economies.

Hopes are high that they signal an improvement in Beijing-Tokyo ties that were severely strained over the Senkaku-Diaoyu islands territorial dispute in 2012, and have remained so ever since over a range of diplomatic and strategic differences ranging from the South China Sea to North Korea.

The results of meetings between Abe and Chinese President Xi Jinping, however, are still to come, and may include thornier political issues than the economic deals done between Li and Xi.

Business, financial stability

Early reports coming out of Beijing lack details, but the meeting between Abe and Li appears to have produced some substantial deliverables.

According to Li, some 500 business deals worth $18 billion were officially signed. These included moves to cooperate in developing cities and giant infrastructure projects around Asia. One such joint “smart city” project could be in Thailand, according to Japanese reports.

The key outcome so far appears to be the resumption of a bilateral currency swap that was nixed in 2013 – a sign economic realpolitik is entering China-Japan relations, with an unintended nudge from Trump’s tariffs, and possibly as a hedge against the coming financial storm the IMF has warned may be on the horizon.

The three-year, $30 billion pact between both central banks aims to enhance financial stability in Northeast Asia and will pave the way for links between financial exchanges that traders long craved.

In discussions with Li, Abe’s team also agreed to boost cooperation in securities markets. That includes exchange-traded funds and smoother clearance between dealers and counterparties.

The yuan clearing bank to be set up in Japan, meantime, will make it easier for companies and financial entities to conduct cross-border transactions and investments.

These two steps should win Trump’s attention. A key priority of Xi has been to reduce the dollar’s dominance in world trade. On Friday, the No. 2 and No. 3 economies began setting up a bilateral infrastructure to at least begin phasing out the US currency.

Abe called Friday an “historic turning point.” At least where the dollar’s reserve status is concerned, it may well be.

Free trade details remain vague

Abe expressed hopes of greater two-way access to finance, health care, infrastructure, logistics and other sectors. Friday’s negotiations also featured talk of a China-Japan-South Korea trade zone – a long-discussed, but so-far unrealized project. Tokyo and Beijing also agreed to cooperate in a series of yet-to-be-named third-country building projects.

One area where both sides appeared to agree was in freer trade at a time when Trump’s tariffs loom long over the region. Beijing is being driven into the arms of Japan – a nation with which it has many a gripe – as Washington’s tariff arms-race crimps mainland exports, fixed-asset investments, and purchasing managers’ orders, while slamming bourses in Shanghai and Shenzhen.

Abe is also getting hammered as Japan becomes collateral damage of Trump’s China assault. Any hopes his Abenomics would boost wages, confidence and productivity are dwindling with global shares.

One solution is freer trade. Abe is furiously promoting the Trans-Pacific Partnership, or TPP, regional free trade model, while inviting key economies to join, including South Korea, Indonesia, the Philippines and others – even Britain.

On Friday, according to reports, Chinese and Japanese officials talked about accelerating the Regional Comprehensive Economic Partnership, or RCEP, process. Yet this China-led free-trade pact between China, Southeast Asia and other Pacific Rim powers – including Tokyo – has become bogged down in territorial disputes and hit other speed bumps. Still, given the lack of detail, it is not clear whether the two parties are aligned on the RCEP.

Abe called Friday’s flurry of deals a “win-win-win” for Asia’s two economic superpowers, but investors need to keep their powder dry until more details become clear, and Tokyo and Beijing need to think even bigger in the weeks ahead.

Even so, Friday’s economic realpolitik could not come at a better moment. Today’s talks in Beijing show what is feasible when leaders push aside disputates and politics and concentrate on what matters.