Ditching US dollar: China, Russia launch financial tools in local currencies

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A bank clerk counts Chinese yuan banknotes at a branch of Industrial and Commercial Bank of China in Huaibei (Reuters/Stringer) and Russian ruble banknotes (Reuters/Ilya Naymushin)

A bank clerk counts Chi­nese yuan ban­knotes at a branch of Indus­tri­al and Com­mer­cial Bank of Chi­na in Huaibei (Reuters/Stringer) and Russ­ian ruble ban­knotes (Reuters/Ilya Nay­mushin)

Chi­na and Rus­sia have effec­tive­ly switched to domes­tic cur­ren­cies in trad­ing using finan­cial tools as swaps and for­wards, as they seek to reduce the influ­ence of the US dol­lar and for­eign exchange risks.

The agree­ment signed in the end of Octo­ber comes into force Mon­day, Decem­ber 29, and pro­vides a cur­ren­cy swap of CNY150 bil­lion (up to US$25 bil­lion).

READ MORE: Defy­ing the dol­lar Rus­sia & Chi­na agree cur­ren­cy swap worth over $20bn

The country’s For­eign Exchange Trade Sys­tem will car­ry out sim­i­lar trans­ac­tions with the Malaysian ring­git and the New Zealand dol­lar.

From now on yuan swaps are avail­able for 11 cur­ren­cies on the for­eign exchange mar­ket.

Chi­na won’t stop yuan glob­al­iza­tion or cap­i­tal account open­ing because of the volatil­i­ty in emerg­ing mar­ket cur­ren­cies,” Ju Wang, a senior cur­ren­cy strate­gist at HSBC Hold­ings Plc in Hong Kong told Bloomberg.

Chi­na has set up bilat­er­al cur­ren­cy swap lines with more than 20 coun­tries and regions since 2009, includ­ing Switzer­land, Brazil, Hong Kong, Indone­sia and South Korea, Xin­hua News report­ed in July.

A swap is a finan­cial tool to ease trans­ac­tions by exchang­ing cer­tain ele­ments of a loan in one cur­ren­cy, like the prin­ci­pal or inter­est pay­ments into an equiv­a­lent loan in anoth­er cur­ren­cy.

Cur­ren­cy for­ward is an oblig­a­tion of two par­ties to con­vert an agreed amount of one cur­ren­cy into anoth­er by a cer­tain date at an exchange rate spec­i­fied at the moment of sign­ing the deal.

Rus­sia and Chi­na have long been look­ing for ways to cut the dollar’s role in inter­na­tion­al trade. The ques­tion is sig­nif­i­cant for Chi­na as 32 per­cent, or $4 tril­lion of its for­eign exchange reserves are in US bonds, which means there is a vul­ner­a­bil­i­ty to fluc­tu­a­tions in the exchange rate.

READ MORE: Russia’s biggest bank launch­es financ­ing in Chi­nese yuan

Russia’s for­eign exchange reserves are worth $398 bil­lion, and the US dol­lar accounts for about $162.45 bil­lion.

The country’s eco­nom­ic growth has slowed amid a stand­off with West­ern coun­tries over the Ukrain­ian con­flict. After the country’s finan­cial sec­tor faced EU and US sanc­tions it became hard for Russ­ian busi­ness­es to raise finance in the West.

Chi­nese author­i­ties are par­tic­u­lar­ly inter­est­ed in cur­ren­cy swap lines with devel­op­ing coun­tries, main­ly from the Asia-Pacif­ic region. Aus­tralia, New Zealand, Brazil, Sin­ga­pore, Hong Kong, Argenti­na, and Malaysia are active­ly involved in trans­ac­tions with Chi­na.