Putin Tells China He’d Love to Use More Yuan but Beijing Must First Allow It to Float
Must ditch the Communist capital controls holding it back
There were two Chinese executives highlighted at this year’s Russia Calling! conference, an investment forum put on by VTB Capital in Moscow. Both of them lobbied Russia to accept renminbi (RMB) as a form of payment and investment.
Alas, Russian president Vladimir Putin threw somewhat of a wet blanket on their aspirations.
“The renminbi has restrictions due to convertibility, and China says it is too early for full market liberalization like the ruble,” Putin told a standing-room only crowd of more than 2,000 people in Moscow’s Crowne Plaza hotel on Wednesday. “It’s realistic to want to do trade settlements in our own national currencies, but the instances of that have been low. As for raising money in RMB, we are not interested in the currency, we are interested in the investment proposal first.”
Putin was responding to a question from someone from the Russia-China Investment Fund, a private equity fund that captures China wealth and brings it to Russia. The Fund recently did a secondary share offering for its shares in Detsky Mir, Russia’s version of Toys ’R’ Us.
Yanzhi Wang, executive director of the five-year-old Silk Road Fund, was the first to bring up the question of using the renminbi as a swipe against the dollar. Both countries seem to be locked into Washington’s permanent enemy list, so they are well aware of the risks dollar-dependence is on their ability to grow their economies and trade with other nations.
So Wang is thinking about the future and maybe thinking out loud. He was a forum panelist, unlike the man from the Russia-China Investment Fund.
“Investors like us have to explore practical solutions where the ability to use the dollar is limited,” he said, seated on a white leather chair against a large blue screen with Russia Calling! in both English and Russian. “We have to use an alternative. With the RMB now in IMF currency basket, the RMB is being used more frequently for cross-border trade, using RMB reduces foreign exchange risk and transaction costs,” he said earlier in the day on Wednesday, hours before Putin took the stage around 13:00 Moscow time.
Wang said business relations between Russia and China were deepening, but financial connections between the two were the laggard. “It would be easier if we could invest directly with RMB,” he said. “The local banks or financial institutions can undertake the renminbi-ruble exchange to make it easier. This is the future business cycle for us, in our view. If that works, then more RMB capital could flow into Russia.”
The problem with that is China, not Russia.
China does not allow RMB to free flow out of the country. Its qualified domestic institutional investor program is capped at what investors can bring abroad legally. No one is talking about increasing the quotas, which would surely be needed for RMB to leave China as private equity to be placed, for example, in Russian real estate, farmland or gas pipelines in Siberia. Corporations have other sets of rules for investing abroad.
The Silk Road Fund was set up to invest in projects related to China’s One Belt One Road initiative. The fund has around $30 billion invested. Some 70% of those investments are just equity positions.
Russia is the largest position in the fund because of its roughly 10% stake in the Yamal LNG project, the flagship China-Russia investment project in their often touted new “alliance.”
For investments in renminbi, dollar or rubles, China is mostly interested in putting them to work in energy infrastructure and agriculture due to its shared border with Russia.
China imported $137 billion in agricultural commodities worldwide last year, and Russia accounted for only 2% of it.
“I remember last year Putin said that ‘We are not aiming to ditch the dollar, but the dollar is ditching us,’ ” Wang said, adding that Chinese markets are opening up, making it easier for cross-border investment in their securities markets.
The Shanghai and Moscow Stock Exchanges are connected now, though trade is relatively thin according to the Moscow Exchange.
“Russia has a new market to explore in China,” Wang said. “The 10-year China bond is 150 basis points higher than the 10-year Treasury bond and 300 points higher than euro bonds,” he said about bond yields, selling the audience on China’s new great wall of money.
China’s president Xi Jinping took an unveiled swipe at President Trump this summer during a meeting with President Putin when he called the Russian leader his “best friend.”
Trump has referred to Xi as a good friend ever since he was elected. Xi was the first national leader invited to Mar-a-Lago, Trump’s vacation property.
In September, Russian and Chinese news agencies reported that the two countries wanted to double their trade over the next five years to $200 billion by 2024—up from $107 billion last year. Most of this will come from investments in Yamal and agriculture. By comparison, U.S. and Russian trade is under $40 billion.
Russia may have issues with the U.S., but the dollar is still king, along with the euro, Russia’s main sales market. Putin is not yet sold on the renminbi.
Neither is the rest of the world.
In October 2019, the Chinese renminbi dropped one position to the sixth-most-used currency in global settlements, with a share of 1.65%, according to the SWIFT RMB Tracker.
The RMB has maintained a roughly 2% of global settlements for at least a year.
RMB payments value decreased by 12.31% compared to September 2019, while payments in other currencies increased by 4.17%. In terms of international payments excluding the eurozone, the RMB was ranked eighth, with a share of just 1.06% of global trade settlements in October.
Even if China were to up the ante into Russia because of further internationalization of the renminbi—something that’s very much restricted at the moment—China accounts for less than 2% of Russia’s foreign direct investment. It’s probably not the RMB that’s holding the Russians back.
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I think Mr. Putin has learned a great deal from the US-China trade experience.
The imminent financial crisis is going to upheave the current dynamics.