Surging Yuan could pose challenges for Russia and China

The fall of the Russian Ruble by 30 per cent following the latest Western sanctions has caused turbulence in the currency market.

This compelled Moscow to raise its interest rate to 20 per cent from 9.5 per cent apart from issuing a directive to bar citizens from transferring money outside Russia including for debt payments. The exchange rate variation has also caused concern in the Chinese financial market.

The Yuan appreciated to a level not seen in nearly four years and hit a record high with a surge of 25 per cent against the Ruble. The People's Bank of China (PBoC) set a weaker-than-expected reference rate for the Yuan.

The volatility has led to waning interest in the Chinese financial market to trade the Yuan-Ruble currency pair as the gap between them increased. The central bank had so far refrained from intervening through its daily fixing this year, except for February 7.

China is dithering from exchange rate correction with the intention to help Russia as a strategic partner and keep trading open as Moscow is facing isolation from the global financial system.

However, some Chinese banks have suspended trading of the currency pair and at least two mid-sized Chinese banks have stopped proprietary trading of Ruble-Yuan and Ruble-Dollar to control risks.

It would cause a lot more trouble for Russia to deal with its biggest trading partner China, since 17.5 per cent of the China-Russia cross-border trade was settled in Yuan in 2020, up from 3.1 per cent in 2014.

China has decided to double the Yuan trading band for the Ruble. The China Foreign Exchange Trade System informed that the currency pair would be allowed to trade 10 per cent around the fixing rate starting March 11 to meet the demand for market development.

China is easing government exchange rate controls to let the Russian Ruble fall faster in value against the Chinese Yuan and help Beijing avert Russian sanctions.

Holding the exchange rate steady would require China to pay more Yuan in exchange for Rubles to Russian buyers than the prevailing market exchange rate.

The Ruble has already fallen by around 40 per cent in value since the imposition of Western sanctions.

It is expected that Russian demand for Chinese goods may deteriorate. Beijing's trade with Russia reached USD 147 billion in 2021, compared with USD 828 billion and USD 756 billion, respectively, with the EU and US.

However, Russia's Yuan-denominated reserves could help mitigate some of the challenges. About 13 per cent of the nation's reserves, or an estimated USD 77 billion, were in Chinese assets as of June 2021.

This is important for Russia because it is over USD 600 billion reserves stored in Dollars and Euros will not be accessible as Western banks would not deal with the Russian Central Bank due to sanctions.

The immediate impact of the Russia-Ukraine conflict on foreign-invested enterprises (FIEs) in China is limited, but the fallout from the conflict may hold various direct and unintended consequences for foreign businesses operating in China.

FIEs engaged in direct trade with Ukraine, Russia, and Belarus would feel the immediate impact of the conflict. The situation with Russia and Belarus is more complicated, as parsing which sanctions will impact companies in China can be difficult.

The war in Ukraine represents a threat to China's economy and could lead to a diplomatic backlash over its support for Moscow. As the biggest importer of oil and a big buyer of food from around the world, China's economy is deeply exposed to the market turmoil that the war and subsequent sanctions have unleashed.

For instance, import orders from countries such as Poland and Germany with the Zhejiang-based company had been cancelled. A Munich-based client held that 'it feels terribly wrong to send money to a country that is tolerating war in Ukraine'. It also risks a deep diplomatic backlash, especially in Europe, where many see it as little short of an accomplice to the invasion.

( With inputs from ANI )

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