Moves by China and Russia to reduce reliance on the US dollar are set to continue at the end this year or early next year with the Ministry of Finance in Moscow likely to launch its first yuan-denominated bond.
Moscow is hoping a yuan bond will lift interest by Chinese investors in Russian assets and it would also help to create benchmarks for the setting up of hedging options for roubles and yuan, sidestepping the use of the US dollar.
“Currently, several banks led by Gazprombank and [China International Capital Corporation] are making efforts to realise this first yuan bond, [but] there are still some technical details we are working on,” said Cheng Daming, executive director at the China International Capital Corporation, one of China’s leading investment banks. “With some push, and joint efforts, we do believe we will realise this deal within the year or the beginning of next year.”
The Russian yuan-denominated bond will give Chinese investors another investment opportunity after China’s central bank updated rules on the Renminbi Qualified Domestic Institutional Investors scheme last year. This allows Chinese investors to buy yuan-denominated products in overseas markets, as long as yuan investments are not converted into foreign currencies.
“Because Chinese bond investors are not familiar with credit risk of Russia sovereign debt and the Moscow Stock Exchange, they need more time to get familiar with the whole deal structure, that might currently be the most important thing for this deal to take place,” Cheng added.
The bond would be the first-ever Russian sovereign debt issue in yuan, and it is expected to be listed on the Moscow Stock Exchange. Russian sovereign debt is rated as investment grade by all three international rating agencies, Fitch, S&P Global Ratings and Moody’s, meaning it presents a relatively low risk of default.
The idea was first proposed in 2016, although there have been several delays in putting the deal together. It was revived last year with China and Russia seeking to further strengthen ties amid escalating tensions with the United States.
The two nations have been keen to cut their dependence on the US dollar for some time as Washington uses access to the global US dollar payments system as a weapon to punish nations and individuals for breaking its laws, even outside the US.
To cut reliance on the US dollar, Moscow and Beijing have also talked about establishing a new system for direct yuan-rouble payment settlements, although the project has also suffered multiple delays.
In bilateral trade, around 14 per cent of payments are already conducted in yuan and about 7 to 8 per cent in roubles, according to Russia’s Ministry of Finance. China is Russia’s largest trading partner, while Russia is China’s largest supplier of crude oil. [The plurality is settled in euros.]
The Russian central bank has also been gradually substituting its US dollar-denominated assets for yuan assets in its foreign exchange reserves portfolio, purchasing US$44 billion worth of the Chinese currency in the second quarter of 2018, while selling more than US$100 billion. Russia held US$67 billion in yuan as of mid-2018, 15 per cent of its international reserves.
Since the first western sanctions were imposed on Russia in 2014, Moscow has stepped up building its own financial infrastructure to protect from further curbs on the activity of its banks and companies. Moscow has already raised capital this year selling Eurobonds denominated in euros and the US dollar. [Not that it needs to, but to keep ties with western investors.]
Russian bank and exchange representatives, however, have expressed frustration over the lack of progress on deepening financial market connections with China despite supportive rhetoric from the two governments.
Denis Shulakov, first vice-president at the state-owned Gazprombank, said the yuan bond deal is important because it helps to establish a benchmark for creating more hedging options for those investing or trading in the Chinese currency.
Overall, foreign investors now hold slightly more than 2 trillion roubles (US$30.2 billion) of debt issued by the Russian Ministry of Finance, he added.
“No Chinese investors are buying Russia’s Ministry of Finance debt in roubles, that’s why the idea is to buy that debt in [yuan],” he said.
“Financial instruments are all dealt on the basis of trust. While foreign investors from the West seem to trust the Russian market, Chinese investors, by not participating in it at all, are seen as unaware or hesitant. This is not a technical, rather regulatory issue, it is an issue of trust of each other’s financial systems.”
Source: South China Morning Post