The Chinese RMB Yuan Has Become Russia’s Reserve Currency. This Is What It Means.
Last year, prior to the Ukraine conflict, the demand for the Chinese RMB Yuan on the Moscow Exchange was rather muted, utilized mainly by small traders involved in cross-border transactions, themselves still recovering after lengthy shutdowns on the Russia-China border due to strict Covid regulations.
By July this year, it has transformed to become the third most demanded foreign currency in Russia after the US dollar and the Euro. The Moscow Exchange now trades close to 890 billion Rubles (US$14 billion) in RMB Yuan, only slightly behind the volume of Euros trading on the Moscow Exchange at 1 trillion Rubles (US$16.5 billion).
The decision to turn from West to East, of course, is up to investors and depositors, but some attention should be paid to various features of China’s currency to understand the risks and likely trends.
In fact, there are two versions of the Chinese RMB Yuan. There is the “Renminbi” (RMB), which translates as “people’s currency”, and there is an “Offshore” Yuan. The RMB is used in China for internal settlements, and is also traded on international exchanges under the ticker CNY. Its exchange rate is strictly regulated by the People’s Bank of China (PBOC).
The “offshore” Yuan, which is used mainly in international settlements, is also traded on exchanges, under the CNH symbol. It is less strictly regulated and more market-oriented in its permitted trading band than the CNY.
In Russia, regulated currencies are traded on the Moscow Exchange. China’s PBOC does not allow its national currency to fluctuate much in either direction, and for some time now the CNY exchange rate has not gone beyond 6–7 Yuan per US dollar. That means that for Russian (and other international investors) the Chinese Yuan can be regarded as a safe haven for a depositor. The down side is that it is not suitable to make trades by playing on the difference in the Yuan against the US Dollar, Euro or Ruble, as most likely nothing will come of it. Saving money in Yuan is safe enough (provided that Russian banks do not present any unpleasant surprises), however it should be remembered that the PBOC can devalue its currency at any time should the interests of the Chinese state and exporters so require.
For Russia – and certain other countries, from the perspective of insuring against geopolitical risks, such as the in the current situation, the Chinese Yuan is the best choice for Russian investors, since Russia possesses some 17% of its total foreign reserves in the currency (among the highest in the world), and China has not imposed sanctions against Russia. Russia has also completely removed all US dollar holdings from its National Wealth Fund.
However, the main problem of maintaining foreign currency deposits in Russia today are the restrictions imposed by the Russian Central Bank and the commissions that some banks impose for keeping deposits in other monetary units. It should be noted for example that since the beginning of 2022, the Chinese Yuan has fallen in price against the Russian Ruble by over 23% as a result of Russian moves to strengthenthe currency and move it to an asset-backed reserve (mainly gold) against world reserve currencies in March and April this year.
For this reason, at present, it is better to keep funds in Russian banks on Ruble deposits. Should investors want to keep money in banks for a longer time, then it is a better strategy to divide the savings portfolio between Rubles and Yuan, and to keep the Yuan in banks where, firstly, the Chinese currency deposits are available, and secondly, there is no commission for keeping deposits in foreign money, and who offer a reasonable percentage for deposits in foreign currency – at least 1– 1.5% per annum.
Meanwhile, is it possible to invest in financial instruments denominated in Chinese Yuan? The topic is of interest perhaps from 2023 but depends on your broker’s ability to access international stock exchanges. If there is such an opportunity, it will be possible to buy Chinese stocks or bonds. But if the Yuan does not grow strongly against other currencies, including the Ruble, then investors would lose on the difference in exchange rates, although this could be offset by dividends or high profits from the difference in purchase and sale prices.
At present, the economic situation concerning the Russian Ruble is not so problematic as to require the immediate sales of the national currency and shift to Chinese Yuan. But it should be noted that the Chinese currency is interesting as a value store over the longer term. That will especially become apparent if the Russian government returns to practical fiscal rules soon, and the Russian Ministry of Finance starts buying Yuan again for the National Welfare Fund, which it has done in the past. At that time, China’s currency will have a good upside potential when valued against the US Dollar. The implications of that, which can be expected during winter 2022/2023, when global oil and gas prices will be at their highest, will be interesting to see, and especially should other countries start to follow suit and reduce their own US dollar holdings.
This article has been adapted from, had additional commentary added, and translated from the original, written by Natalia Milchakova. That article can be seen here.
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