Currency switch: A clerk counting the yuan at a bank in Huaibei, central Anhui province, China. The trade using the currency will predominantly be in the commodity and energy sectors, according to a senior investment strategist. — AP
SINGAPORE: China has dramatically increased use of the yuan to buy Russian commodities over the past year, with nearly all of its purchases of oil, coal and some metals from its neighbour now settled in the currency instead of dollars, sources told Reuters.
The switch to yuan to pay for much of a roughly US$88bil (RM392bil) commodities trade in the wake of the Ukraine war accelerates China’s efforts to internationalise its currency, at the expense of the dollar, although strict capital controls are expected to limit its global role in the near term.
In March, the yuan became the most widely-used currency for cross-border transactions in China, overtaking the dollar for the first time, official data showed, although its share as a global payments currency remains small at 2.5%, according to the Society for Worldwide Interbank Financial Telecommunication (Swift), compared with 39.4% for the dollar and 35.8% for the euro.
Chi Lo, senior investment strategist at BNP Paribas Asset Management in Hong Kong, predicts a long-term “snowball effect” as more countries join the yuan bloc to reduce risks of dollar exposure, “especially after they’ve seen what the US-led sanctions against Russia have done.”
“This is a very long term development stretching into the coming one or two, even three decades. For now, and for the foreseeable next few years, I think the trade using yuan will predominantly be used for commodity and energy,” he said.
Despite Beijing’s push beginning over a decade ago to internationalise the yuan, the currency had only been used sporadically in big Chinese commodities purchases given that most global trading of oil, gas, copper and coal is priced off dollar-based benchmarks.
That began changing last year as western buyers shunned purchases of Russian goods in the face of mounting sanctions following Moscow’s invasion of Ukraine.
Chinese buyers stepped in to snap up discounted crude oil, coal and aluminium, boosting 2022 commodities imports from Moscow by 52% in value terms.
That helped save China billions of dollars as its economy reeled from Covid lockdowns, with purchases poised to grow this year as China’s economy recovers.
Total settlements on Cross-Border Interbank Payment System (CIPS), China’s alternative to the Swift international payment system, rose 21.5% year-on-year to 96.7 trillion yuan (US$14.02 trillion or RM62.4 trillion) in 2022, Chinese central bank data showed.
Nearly all of China’s oil imports from Russia, mostly crude but also smaller volumes of fuel oil, are now settled in yuan, five trading executives with direct knowledge of the matter said.
China imported a combined US$60.3bil (RM268bil) worth of crude oil and fuel oil from Russia last year, according to Chinese customs.
The People’s Bank of China did not immediately respond to a request for comment.
Globally, yuan use has been gaining momentum. Argentina last month said it would start paying for Chinese imports in yuan to ease pressure on its dollar reserves, while in March France’s TotalEnergies sold China the first yuan-settled liquefied natural gas cargo.
The shift began in April 2022, after key Russian banks were removed from Swift following Russia’s Feb 24 invasion of Ukraine, which Moscow calls a special military operation.
Initially, some of the Chinese buyers struggled to obtain trade financing in dollars as banks banned the business, forcing the use of telegraphic transfer – equivalent to cash pre-payment – which posed a challenge in particular to cash-strapped independent refiners, traders said.
Yuan settlement surged after the US-imposed import ban and as Europe stepped up restrictions on Russian exporters before eventually slapping a trade embargo, with a Western price cap imposed on Dec 5 on Russian crude exports.
“All seaborne Russian oil sales to China are now settled in yuan since the price cap, sidelining the last small number of banks that were handling US dollars,” said one trading executive. — Reuters
