A New Way To Trade

By DING WENLEI

A New Way To Trade

By DING WENLEI

China expands yuan settlement in trade with Russia, while allowing the yuan to trade against the ruble

Cross-border trade between China and Russia was bountiful throughout the 1990s as a group of Chinese and Russian dealers,nicknamed thedaoye, or pro fi teers who buy low and sell high, shuttled consumer goods from China to Russia. These dealers, still around but far fewer in number today, should be rejoicing after the announcement of the latest progress in cross-border trade between the two countries: China and Russia have decided to settle their bilateral trade deals using the Chinese yuan and Russian ruble, bypassing the need to use the U.S. dollar.

The decision marked one of many fruits from the recent trip Chinese Premier Wen Jiabao made to Russia. Wen and Russian Prime Minister Vladimir Putin announced the direct yuan-ruble settlement on bilateral trade in St. Petersburg on November 23.

The direct settlement would save dealers of both sides the troubles of converting between three currencies—from the yuan, to the dollar, to the ruble and vice versa—and avoid losses in pro fi ts due to exchange rate differences.

It is just the beginning of breakthroughs in Sino-Russian bilateral trade. A day before the announcement, China began allowing the yuan to trade against the ruble, a seventh foreign currency, in the interbank foreign exchange market.

The Moscow Interbank Currency Exchange started trading the yuan against the ruble for the fi rst time on December 15,making Russia the fi rst country to do so in its interbank foreign exchange market.

“These measures are symbols of the deepening of Sino-Russian economic ties and will de fi nitely promote the reform of the global monetary system,” said Ding Zhijie,Dean of the School of Banking and Finance at the University of International Business and Economics.

The direct yuan-ruble settlement is expected to boost Sino-Russian bilateral trade,keep exporters and importers away from exchange-rate risks, and reduce their dependence on the U.S. dollar in settling payments.It is also hoped to bring win-win results for merchandisers and commercial banks from both countries.

But a number of factors could prevent the two countries from conducting monetary cooperation on a large scale, including the comparatively small Sino-Russian trade volume, the not yet fully convertible yuan, and the exclusion of energy products in the direct yuan-ruble settlement arrangement.

In addition, the yuan is only traded against the ruble in the spot exchange market between Chinese banks, and more complicated transactions such as forward transactions and swap transactions are not expected in the short term.

Bypassing the dollar

Sino-Russian trade grew rapidly from 1999 to 2008, increasing by nearly 30 percent annually. In the fi rst 10 months of 2010,China became Russia’s second largest trading partner; Russia is still one of China’s top 10 trade partners. China’s Ministry of Commerce estimated that Sino-Russian bilateral trade is expected to recover to its precrisis level, exceeding $50 billion this year.

Trade between China and Russia was largely settled in the U.S. dollar and the euro. The U.S. dollar was used in 85 percent of payments for Sino-Russian trade in 2008, according to customs statistics from Heilongjiang Province.

But the dollar has been sharply depreciating against major currencies since 2001.The U.S. Federal Reserve’s recent quantitative easing policies in particular raised concerns over mounting risk in international trade settlements using the dollar and called into question the dollar’s dominance in the world’s monetary system.

In addition to increasing costs and risks with unstable exchange rates, China’s and Russia’s dependence on the U.S. dollar in bilateral trade settlements aggravated the imbalance in international trade settlements,while entailing losses to merchandisers of both countries.

“Direct yuan-ruble settlement will greatly reduce transaction costs and risks, and effectively mitigate the impact on both countries’foreign exchange rates and real economies from the fi nancial crisis,” said Li Fuchuan, a research fellow at the Institute of Russian, Central European and Central Asian Studies under the Chinese Academy of Social Sciences.

China made similar trade settlement arrangements with major countries to address problems with an unstable and depreciating dollar, said Shi Qiping, a commentator from the Hong Kong-based Phoenix TV.

The United States abused its right to print more dollars and continued the quantitative easing policy to fi ght the economic slowdown after the 2008 fi nancial crisis, which has created excessive liquidity globally and increased hot money in fl ows into emerging markets, Shi said.

These inflows created pressures for emerging countries to appreciate their currencies and weakened the competitiveness of their exports. As a consequence of the U.S.excessive dollar issuance, China has suffered huge losses to its foreign exchange reserves.

“At present, China has to reduce its reliance on the unstable dollar, especially in trade settlements. That’s why China is choosing to establish direct settlement with neighboring countries,” Shi said.

Using the yuan for cross-border trade settlement will constitute a restraint on the dollar and U.S. monetary policy behavior and such restraints are necessary after the U.S.Federal Reserves renewed the quantitative easing policy, said Ding Zhijie.

Limited impact

But the direct yuan-ruble settlement will not pose a direct challenge to the U.S. dollar as the major settlement currency for international trade, said Li Fuchuan.

The scale of bilateral trade between China and Russia is not large enough to have a signi fi cant effect on the U.S. dollar’s dominance in international trade settlement, he said.

Trade volume between China and Russia is comparatively small, accounting for only one seventh of China’s current total trade volume, although the two economies are complementary in many aspects such as commodities, technologies, labor, resources and industrial structure.

Meanwhile, yuan-ruble transactions have been conducted in the two countries’ border areas for several years, but the amount settled in the ruble and the yuan has been minute compared with the total volume of bilateral trade. Statistics from the Central Bank of Russia showed Sino-Russian trade reached$38.8 billion in 2009, but trade deals settled in the ruble amounted to15.5 billion rubles($504 million) and those settled in the yuan only totaled 53 million yuan ($7.96 million).

Only 35 to 50 major importers in Russia are interested in the direct settlement,Vladimir Portyakov, Deputy Director of the Institute of Far Eastern Studies of the Russian Academy of Sciences told the Beijing-basedFinancial News.

Russian dealers are unwilling to use the yuan to settle payments largely because the yuan is not fully convertible and the arrangement excludes energy commodities, China’s major imports from Russia, Portyakov said.

Portyakov also said Russian economists are concerned about the Russian economy not being able to digest large amounts of the yuan if the yuan is used in settling energy-related transactions. But he suggested both countries gradually push forward the arrangement.

“China can settle some energy imports of small amounts with the yuan and Russia can use their yuan reserves accumulated from energy exports to import consumer goods from China,” he said.

“Given another couple of years, dealers accustomed to using the dollar will see the advantages of direct yuan-ruble settlement such as convenience, decreased transaction costs and the yuan’s reliability,” Ding Zhijie said.

CLOSER TRADE:Russian customers pick up goods at the China-Russia Mutual Trade Zone at Manzhouli, Inner Mongolia Autonomous Region. Trade between the two countries has been booming in recent years

Yuan Settlements in Cross-Border Trade

The Chinese Government announced in December 2008 to allow exporters in two economic powerhouses—Guangdong Province and the Yangtze River Delta (including Shanghai and parts of Zhejiang and Jiangsu provinces)—to use the yuan to settle deals with traders in Hong Kong and Macao, and those in southwest China’s Guangxi Zhuang Autonomous Region and Yunnan Province to use the yuan to trade with their partners in ASEAN (Association of Southeast Asian Nations) countries.

Soon after the announcement, China signed agreements with eight neighboring countries, including Viet Nam, Myanmar, Russia, Mongolia,Cambodia, South Korea, Kazakhstan and Nepal, to allow the use of the yuan in settling cross-border trade payments.

The government decided on April 9, 2009 to launch the trial program of yuan settlements in Shanghai and four cities of Guangdong Province.

The yuan settlement pilot program was expanded June 22, 2010, to Beijing,Tianjin, Chongqing, 11 provinces and four autonomous regions.

Meanwhile, the regions where Chinese exporters can use the yuan to settle trade agreements were extended from the original ASEAN members,Hong Kong and Macao to the rest of the world.

Sino-Russian Direct Trade Settlements

March 5, 1992The Sino-Russian intergovernmental agreement on bilateral economic and trade relations is signed, providing a legal framework for bilateral cooperation between the two countries.

2002China’s central bank, the People’s Bank of China, and the Central Bank of Russia sign an agreement on interbank trade settlements in their border areas.2003Trial programs of direct yuan-ruble settlement commence in Heihe of Heilongjiang Province and Blagovescensk, capital of Amur, Russia.

2007The central banks of both countries sign an agreement on using the yuan and the ruble in cross-border trade settlements, expanding the practice to cover the entire border and tourism and related services.

November 23, 2010The two countries lift restrictions on using the ruble and the yuan in cross-border trade settlements, and amended the 1992 intergovernmental agreement on bilateral economic and trade relations.