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Asia

Yuan-ruble trading challenges dollar's predominance

On December 15, the Moscow Interbank Currency Exchange (MICEX) is taking up trading in the Chinese currency. Russia’s central bank had announced direct exchange transactions between the yuan and the ruble in April.

China's government has a tight grip on the yuan's exchange rate

China's government has a tight grip on the yuan's exchange rate

The yuan trading in Moscow had been scheduled to begin in September, before it was postponed. In November, China’s banking officials already added the Russian ruble to the foreign currency basket which is currently being traded at the Shanghai stock exchange.

Both countries have been planning for a long time to make their currencies mutually convertible. Russia’s president Dmitry Medvedev has repeatedly called for strengthening the role of regional reserve currencies.

Alternatives to the dollar

Russian advocates regional reserve currencies

Russian advocates regional reserve currencies

Both countries are trying to establish their currencies as alternative international reserve currencies. Especially China is eager to reduce its dependency on the US dollar for trade transactions. Beijing is also concerned since its foreign exchange holdings are mostly in US dollars.

Li Daokui, a member of the central bank’s Monetary Policy Committee, said earlier this year that the yuan’s internationalization was "inevitable." China’s government plans to fully introduce the yuan into the global currency markets by between 2020 and 2025.

Intensifying bilateral trade

Bilateral trade between China and Russia reached 45.1 billion US dollars (30.6 billion euros) in the first ten months of 2010, according to the Chinese embassy in Moscow. This means an increase of 43.4 percent compared to last year.

"It makes sense if two huge economies want to keep the influence of a third dominant economic power house out of their bilateral trade relations," Bhanu Baweja from Swiss bank UBS told the Bloomberg news agency.

Circumventing the dollar

The commencing currency trade between China and Russia can also be seen as a futher sign of growing trade relations. About 13 percent of Russia’s imports are from China – mostly finished products. Many Russian companies involved in this kind of trade will appreciate the chance to buy Chinese yuan.

Chinese companies mostly buy timber, coal, oil and gas from Russia. By avoiding the conversion first from rubles into US dollars and then back to the yuan, companies will save at least 0.1 to 0.3 percent of the merchandise value. The MICEX even claims the benefits will be much higher, at up to five percent.

Chinese companies will profit from direct yuan-ruble trading

Chinese companies will profit from direct yuan-ruble trading

More flexibility

The two countries have agreed to set a middle rate of 4.6711 yuan for one ruble. The currency pair is allowed to fluctuate five percent above or below the middle rate. This is more than the three percent of fluctuation of the yuan in trading with the dollar.

At the same time the Chinese central bank will continue its efforts for a more flexible exchange rate system, pegging the yuan to a basket of currencies rather than just the US dollar.

At the beginning, the daily trade volume at the MICEX is expected to be three million yuan (335 thousand euros), a small amount compared to the four to five billion US dollars and 200-300 million euros traded every day.

Author: Klaus-Helge Donath (Moscow), Chi Viet Giang
Editor: Thomas Baerthlein

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