How the yuan is pushing the dollar out of the Russian financial market

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Until February 2022, the volume of yuan trading on the Moscow Exchange was negligible, and the Chinese currency itself was rather in the status of “exotic” than “basic”, despite good relations with China, which our country has long and successfully developed. After the start of the special operation, the situation changed: more than 10,000 sanctions were imposed against Russia by the West, which became a historical record. Many of these measures related to currency restrictions: they simply stopped sending dollars and euros to Russia, which made these currencies “toxic”. Against this background, the yuan became a lifeline for the Russian market, gradually turning into a boat, and then into a whole rescue fleet. As a result, by the end of last year, the volume of Chinese currency trading on the Moscow Exchange increased 41 times. “The reorientation to the yuan from toxic pro-Western currencies has reduced economic and infrastructure risks,” said Mikhail Zeltser, an expert on the stock market at BCS Mir Investments. “The sad experience of blocking half of Russian international reserves in the currencies of unfriendly countries has activated the trend towards de-dollarization of the financial system of our country with a simultaneous increase in turnover in the yuan.”

Economic relations between the two countries have also entered a phase of prosperity. Trade between China and Russia hit a record $190 billion last year, up 29% from 2021. At the same time, for many commodity items, the countries agreed to conduct settlements in national currencies, which also contributed to strengthening the position of the yuan in the Russian market.

“Over the past year, the yuan has largely become a reserve currency for Russia, significantly replacing the US dollar amid restrictions on foreign exchange transactions from the US and the EU,” says Dmitry Morkovkin, a leading researcher at the Institute for International Economic Relations at the Financial University under the Government of the Russian Federation. “So, according to the Bank of Russia, the share of the yuan in foreign trade settlements for exports increased from 0.5% to 16%, and for imports – up to 23%, and the share of the ruble – from 12% to 34%.”

Sinicization of finance

In addition, under the strict supervision of the Ministry of Finance, the structure of the National Welfare Fund (NWF) was oyuanized last year. The share of the Chinese currency in it increased from 30% to 60%. According to the Deputy Minister of Finance of the Russian Federation Vladimir Kolychev, the share of the euro in the funds of the National Welfare Fund will be reset to zero in 2023, leaving only gold, rubles and yuan. The Ministry of Finance also converted market transactions into the currency of the Middle Kingdom instead of the dollar. “In the near future, the Ministry of Finance may start placing OFZs in yuan,” says Roman Chechushkov, head of Renaissance Bank. “In the current conditions, this tool is relevant, since the Ministry of Finance has the opportunity to attract external financing in the conditions of closed Western markets against the backdrop of sanctions.” External loans until 2024 are planned in the amount of up to $3 billion annually (in Chinese currency equivalent). The benchmark for borrowing rates in yuan can serve as the yield of government bonds of China, which for a period of 7-10 years are now at the level of 2.59-2.62% per annum, the expert added.

And, of course, we should mention the historically significant visit of Chinese President Xi Jinping to Moscow from March 20 to 22 — the first trip abroad after his re-election as General Secretary of the Communist Party of China. During a meeting with the Russian President, he promised Moscow to expand cooperation in the areas of trade, investment, supply chains, mega-projects, energy and high technology. For the yuan, this opens up the most promising prospects – its turnover will continue to grow.

Does this mean that a kind of yuanization of the Russian economy is taking place before our eyes, replacing the dollarization observed in past years? Artur Meinhard, head of analytical department for global markets at IC Fontvielle, answers this question positively, drawing attention to the fact that Russia ranked fourth in the world in terms of the use of the yuan in trade with a share of 2.25% on a global scale.

However, not all experts share this point of view, noting that the EU and US currencies still hold part of their positions on the Russian market, although they are noticeably retreating under Chinese pressure. “Statements about the yuanization of the Russian economy are still premature,” said Yevgeny Lashkov, director general of the ABC investment company. – The share of the yuan in export operations, according to the Central Bank, by September 2022 increased to 14%, and in imports – up to 23%. However, for example, the share of export settlements in dollars was 34%, and in euros – 19%. The scale of the reduction in foreign trade in dollars and euros is still more significant than the growth in the share of operations in yuan. Thus, according to the Federal Customs Service, the share of the dollar in contractual conditions decreased by about 40%, the euro – by more than 30%.

World expansion

The increase in the popularity of the Chinese currency is not a purely Russian phenomenon, provoked by sanctions. However, the courage of our country in the field of currency sinicization clearly made an impression on other states. “You can say that Russia is now acting as the vanguard that brings yuanization to the world, first by increasing its share of settlements in yuan directly with China, and now expressing its readiness to settle in Chinese currency with third countries,” says TeleTrade analyst Alexei Fedorov. “So now all the attention is on the willingness of other countries to use the yuan in international trade, given the obvious consequences in the form of worsening relations with the United States.”

And if you look at the events of the last year, this judgment is true: the mass yuanization of the world began after Russia and China sharply increased their interaction in national currencies. Thus, in March it became known that Saudi Arabia was negotiating with China on the sale of part of the oil in yuan. In early April, the largest economy in Latin America, Brazil, agreed with China to also conduct settlements in the currency of the Celestial Empire. In parallel, China has become the main trading partner of most countries of the Black Continent, the main source of imports of goods to Africa. In this role, Beijing has ousted France, which had a strong position in its former colonies, and other European countries, not to mention the United States, which for a long time underestimated Africa. “Developing countries are already beginning to abandon the dollar in international trade,” Natalia Milchakova, a leading analyst at Freedom Finance Global, points out the uniqueness of the ongoing changes. “In 2022, only 39% of all imports and exports in the world were carried out in dollars.”

At the same time, the yuan is playing an increasingly important role in energy trade. At the end of March, it became known that the China National Petroleum Corporation (CNOOC) and the French TotalEnergies made the first deal for China to sell liquefied natural gas for yuan through the Shanghai Oil and Natural Gas Exchange. It turns out that the Europeans are already forced to trade with China in its currency. The yuan is gradually taking over the world, creating a threat to the hegemony of the US dollar in practice, and not in the dreams of individual analysts, as it was 20 years ago.

Chinese coaster

In the past year, most Russians have been following the dollar and euro’s dramatic reversals, sharp gains in March and a more moderate but no less impressive drop to historic lows in late June. However, the yuan experienced no less exciting adventures on the stock exchange during the same period. If at the beginning of 2022, on January 11, 11.8 rubles were given per unit of Chinese currency, then its maximum value was fixed two months later – in the first half of March, when the yuan could be bought for 19 rubles. The minimum exchange rate of the Celestial Empire was noted at the end of June: then, almost 7.7 rubles were given per unit of Chinese currency. The yuan exchange rate was declining last year for 6 months out of 12. On April 7, 2023, the Celestial currency unit on the Moscow Exchange exceeded 12 rubles. This is the first time this has happened since April 21, 2022. It turns out that over the past 12 months, having experienced miracles on the turns, the yuan has returned “to normal” – to levels comparable to those that were a year ago.

Taught by the experience of many experienced crises, the Russians looked at all the currency news of the last year from a purely utilitarian point of view. Thinking about how best to allocate free funds and not be afraid of sharp fluctuations in the exchange rate, a significant part of compatriots are used to transferring part of their savings into another currency. This is effective in practice, and is often recommended by economists. Previously, for many years, investments in dollars and euros really protected the savings of citizens from inflation. But after the Bank of Russia changed policy last year towards more de-dollarization and went to war on accounts with a toxic currency, the public’s eyes turned to the yuan.

What is the strength of the Chinese currency? Yes, that’s where his weakness lies. The rate of this currency is not freely floating, regulated, therefore, it is less sensitive to world news and fluctuations in other world currencies. The People’s Bank of China controls the yuan due to high requirements for existing reserves, which allows you to reliably protect yourself from unforeseen events in the foreign exchange market. Over the past 15 years, these reserves have tripled, which further supports the stability of the monetary unit of the Celestial Empire. On the other hand, if the authorities of the Celestial Empire need to lower the exchange rate of the national currency in order to achieve trade benefits, then they will calmly do this and no market factors will be able to influence such a decision. The People’s Bank of China maintains the yuan in a certain range. Until 2005, this was done by pegging the yuan to the dollar, and since then, up until now, the regulator has pegged the yuan to a basket of 24 currencies. According to data for January 2022, the dollar (20%) occupies most of it, followed by the euro (18.5%) and the Japanese yen (10.8%). The NBK periodically reviews the ratio of currencies in the basket, and, judging by recent events, the share of the dollar in it may change downwards.

With yuan in heart and wallet

The popularity of the yuan among ordinary Russians is growing literally by leaps and bounds. The evidence here is the expansion of supply: deposits in Chinese currency this spring offer to open about fifty of the 360 ​​banks operating in Russia. For comparison: at the beginning of 2022, such savings were available to customers of only 13 banks. According to Natalya Milchakova, it is quite profitable for citizens to open deposits in yuan, but on the condition that the bank does not charge a commission for keeping deposits in foreign currency. At the moment, the rates on deposits in yuan are significantly lower than the ruble ones, but in the future, an increase in the yield on China’s debt is expected, which is likely to lead to an increase in rates on deposits as well.

By the way, in early February, Russian banks began to increase the rate on deposits in Chinese currency: now it reaches almost 3% per annum. This interest on savings in Chinese currency is offered by the largest state-owned bank in the country. The largest commercial bank allows its clients to receive an income of 2.63% on yuan deposits, and in a large bank specializing in mortgages and construction, the rate on them is 2.6%. For comparison: the average maximum rate on ruble deposits by the end of February, according to the Central Bank of the Russian Federation, was 7.68%. Nevertheless, savings in Chinese currency, according to a number of forecasts, may become a key trend in 2024. At least for those who want and have the opportunity to diversify their savings and split them into several currency baskets. The minimum amount of deposits in Chinese currency today starts at 500 yuan (this corresponds approximately to 5.9 thousand rubles), the minimum term is standard – three months.

As Roman Chechushkov pointed out, in addition to buying foreign currency or opening a deposit, citizens can invest in bonds of Russian companies denominated in yuan. This financial instrument is one of the most promising for investments in the Chinese currency. The Moscow Exchange presents a number of yuan-denominated bond issues from a number of “blue chips” – large Russian companies in the energy sector. The volume of yuan bonds placed on the financial market is almost 58.7 billion rubles, the banker emphasized.

“For Russians, the prevalence of the yuan does not threaten anything bad, this is a normal process,” says Andrey Morozov, president of the Eurasian Business Alliance. – Now we need to keep funds, including in yuan. It is necessary to get rid of toxic currencies – the dollar, the euro. And the yuan in this regard is one of the good opportunities to save money.” At the same time, the expert recommends diversifying savings: have half of the funds in yuan, half in physical gold. This will be the best investment strategy, Morozov is sure.