© Reuters. FILE PHOTO: A model of a natural gas pipeline, Russian and Chinese flags, yuan and ruble banknotes in this illustration taken on September 7, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
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by Chen Aizhu
SINGAPORE (Reuters) – China has dramatically increased its use of the yuan to buy Russian commodities over the past year, with almost all of its purchases of oil, coal and some minerals from its neighbor now settling in Chinese currency rather than dollars, which are multi-circulation. executives with direct knowledge of the matter told Reuters.
The shift to the yuan to drive much of the $88 billion in commodity trade in the aftermath of the Ukraine war has accelerated China’s efforts to internationalize its currency at the dollar’s expense, though tough capital controls are expected to limit its global role in the near term.
Official data showed that the yuan – also known as the renminbi – became the most used currency in cross-border transactions in China in March, overtaking the dollar for the first time, although its share as a global payments currency remains small at 2.5%, according to SWIFT, against 39.4%. % for the dollar and 35.8% for the euro.
Chi Lu, chief investment strategist at BNP Paribas (OTC:: Asset Management) in Hong Kong, expects a “snowball effect” in the long run as more countries join the “bloc” to reduce exposure to the dollar, “especially after they’ve seen it do.” US-led sanctions against Russia.”
“This is a long-term development that extends into the next one, two, or even three decades,” he said.
“For the time being, and for the next few years expected, I believe that trading with the RMB will be used mostly for commodity and energy trade.”
Despite Beijing’s push more than a decade ago to internationalize the yuan, the currency has only been used sporadically for large Chinese commodity purchases since most global trade in oil, gas and coal is priced from dollar-based standards.
That began to change last year as Western buyers shunned Russian goods in the face of mounting sanctions after Moscow’s invasion of Ukraine. Chinese buyers stepped in to snap up discounted coal and aluminum, boosting 2022 imports of goods from Moscow by 52% in value terms.
This has helped save China billions of dollars as its economy falters from COVID lockdowns, with purchases poised to grow this year as the Chinese economy recovers.
China’s central bank data showed that total settlements on the Cross-Border Interbank Payment System (CIPS), the Chinese alternative to the international payment system SWIFT, rose 21.5% year-on-year to 96.7 trillion yuan ($14.02 trillion) in 2022.
Almost all of China’s oil imports from Russia, mostly crude oil but also smaller amounts of fuel oil, are now settled in yuan, five trade executives with direct knowledge of the matter told Reuters. China imported $60.3 billion worth of crude oil and fuel oil from Russia last year, according to Chinese customs.
None of the executives wanted to be identified due to the sensitivity of the matter.
The People’s Bank of China did not immediately respond to a request for comment.
Globally, the use of the yuan is gaining momentum. Argentina said last month it would start paying for Chinese imports in yuan to ease pressure on its dollar reserves, while France’s TotalEnergies sold China in March its first LNG shipment paid in yuan.
(Chart: China’s Imports of Oil and Commodities from Russia, https://fingfx.thomsonreuters.com/gfx/ce/zjpqjmnkovx/China%20imports%20of%20Russian%20commodities.jpg)
The shift began in April 2022, after major Russian banks were removed from the SWIFT system in the wake of Russia’s invasion of Ukraine on February 24, which Moscow described as a special military operation.
Some Chinese buyers initially struggled to obtain trade financing in dollars as banks blocked business, forcing the use of wire transfers – the equivalent of an advance cash payment – which was particularly challenging for cash-strapped independent refiners, traders said.
The yuan settled higher after a US import ban, and as Europe stepped up restrictions on Russian exporters before eventually imposing a trade embargo, with a price cap imposed in the West on December 5th on Russian crude exports.
“All seaborne Russian oil sales to China are now settled in renminbi since the price cap was set, sidelining the last small number of banks that used to deal with the US dollar,” said one trade executive.
“Dealing with the US dollar has become very complicated under the rate cap regime. That means a lot of compliance work for the banks,” the person said.
China opposes unilateral sanctions, but fears exposing itself to so-called secondary sanctions.
Russia’s central bank said in March that the yuan’s share of Russian import settlements in 2022 jumped to 23% from 4%.
(Chart: Russian Oil Transactions Flow to China After the Ukraine War, https://fingfx.thomsonreuters.com/gfx/ce/akveqrgmovr/Russian%20oil%20transaction%20flow%20after%20war.jpg)
Last month, Russian Deputy Prime Minister Alexander Novak said Moscow would continue to accept more payments for energy exports in rubles and yuan as it seeks to move away from the dollar and euro.
Russian President Vladimir Putin said that two-thirds of trade between Beijing and Moscow is now settled in rubles or yuan.
Rising commodity imports pushed China’s trade deficit with Russia to $38 billion last year, although the gap narrowed in the first four months of 2023.
hiccups
The transition to yuan payments has not always been smooth.
State energy giant CNBC has been worried for months that pipeline gas imports from Russia’s Gazprom (MCX:) might be cut off because Chinese lenders ICBC and the Bank of China, fearful of secondary sanctions, are eyeing an exit, a senior source said. from work. Trade follows closely.
Industrial and Commercial Bank of China and Bank of China did not respond to requests for comment.
The source said CNBC had been unable to pay Gazprom in dollars for nearly half a year before Bank of Communications took over and switched to payments in renminbi.
Bank of Communications and CNBC declined to comment.
Gazprom, which said last September that it had agreed with CNPC to settle gas trade in rubles and yuan, did not respond to requests for comment.
Gazprom official Alexei Konivitzky said in September that the company faced disruption to payments from China because “many Chinese banks are afraid of secondary sanctions while working with us.”
(Graph: Russian Oil Transaction Flows to China Before the Ukraine War, https://fingfx.thomsonreuters.com/gfx/ce/zgpobewkkvd/Russian%20oil%20transaction%20flow%20before%20war.jpg)
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($1 = 6.8978 renminbi)