Over the past year, China has significantly increased the use of the yuan to purchase Russian commodities, paying for almost all of its purchases of oil, coal, and some metals from its neighbour in the Chinese currency rather than dollars, according to multiple trading executives with direct knowledge of the situation who spoke to Reuters.

China’s efforts to internationalise its currency at the expense of the dollar are accelerated by the switch to the yuan to pay for a large portion of an approximately $88 billion commodities trade after the Ukraine war, while strong capital controls are anticipated to limit its global importance in the short term.

According to official data, the yuan, also known as the renminbi, surpassed the dollar as the most used currency for cross-border transactions in China for the first time in March. However, the yuan’s share of global payments is still small, at 2.5%, according to SWIFT, compared to the dollar’s 39.4% and the euro’s 35.8%.

Senior investment analyst Chi Lo of BNP Paribas Asset Management in Hong Kong sees a long-term “snowball effect” as additional nations join the “RMB bloc” to lower the risks associated with dollar exposure, “especially after they’ve seen what the U.S.-led sanctions against Russia have done,” he said.

“This is a very long term development stretching into the coming one or two, even three decades,” he said.

“For now, and for the foreseeable next few years, I think the trade using RMB will predominantly be used for commodity and energy trade.”

The majority of global trading in oil, gas, copper, and coal is priced using dollar-based benchmarks, thus despite Beijing’s efforts to internationalise the yuan, which started more than 10 years ago, the currency had only sometimes been used in significant Chinese commodity purchases.

Following Moscow’s invasion of Ukraine, western consumers shied away from purchasing Russian goods, but that began to change last year. China stepped in to buy aluminium, coal, and crude oil at reduced prices, increasing Moscow’s commodity imports by 52% in value terms by 2022.

As its economy struggled under COVID lockdowns, this let China save billions of dollars because purchases are anticipated to rise this year as its economy rebounds.

According to figures from the Chinese central bank, total settlements on the Cross-Border Interbank Payment System (CIPS), China’s equivalent to the SWIFT international payment system, increased 21.5% year over year to 96.7 trillion yuan ($14.02 trillion) in 2022.

Five trading executives with firsthand knowledge of the situation told Reuters that almost all of China’s oil imports from Russia, which primarily consist of crude oil but also include lesser amounts of fuel oil, are now settled in yuan. According to Chinese customs, China purchased fuel oil and crude oil from Russia for a total of $60.3 billion last year.

Given the sensitivity of the situation, none of the executives wanted to be named.

There were no comments on the issue from the People’s Bank of China.

Yuan usage has been expanding on a global scale. Argentina announced last month that it will begin paying for imports from China in yuan in order to relieve pressure on its dollar reserves, while in March, France’s TotalEnergies sold China the first LNG cargo with yuan settlement.

The transition started in April 2022, following the removal of important Russian banks from SWIFT as a result of Russia’s invasion of Ukraine on February 24, which Moscow refers to as a special military operation.

The use of telegraphic transmission, which is equal to cash pre-payment, forced some Chinese purchasers to first struggle to get trade finance in dollars. This caused a problem in especially for cash-strapped independent refiners, merchants claimed.

After the U.S. issued an import ban, Europe tightened its restrictions on Russian exporters and eventually imposed a trade embargo. On December 5, a Western price cap was put on Russian oil shipments.

“All seaborne Russian oil sales to China are now settled in renminbi since the price cap, sidelining the last small number of banks that were handling U.S. dollars,” said one trading executive.

“It becomes tremendously complicated dealing in USD under the price cap regime. It means a lot more compliance work for the banks,” the person said.

Despite opposing unilateral penalties, China is afraid of coming under the purview of so-called secondary restrictions.

According to a March statement from Russia’s central bank, the proportion of yuan in import settlements in that country increased to 23% from 4% in 2022.

In an effort to diversify away from the dollar and the euro, Russian Deputy Prime Minister Alexander Novak stated last month that Moscow will continue to accept more payments for energy exports in roubles and yuan.

According to Russian President Vladimir Putin, yuan or roubles are currently used to settle two-thirds of commerce between Beijing and Moscow.

Despite the fact that the difference has closed in the first four months of 2023, China’s trade deficit with Russia increased to $38 billion last year as a result of soaring commodities imports.

Yuan payments have not always been implemented smoothly.

According to a senior source who closely monitors the market, Chinese lenders ICBC and Bank of China considered exiting the sector in fear of secondary penalties, which led the state energy behemoth CNPC to worry for months last year that their piping-in of gas from Russia’s Gazprom might be reduced.

There were no comments on the issue from ICBC and Bank of China.

Before Bank of Communications took over and switched to paying in yuan, CNPC was unable to pay Gazprom in dollars for over six months, the person claimed.

There were no comments from Bank of Communications and CNPC.

Requests for response from Gazprom, which claimed in September of last year that it and CNPC had agreed to settle gas transaction in roubles and yuan, went unanswered.

In September, a representative from Gazprom named Alexei Konivetsky stated that the business had seen a halt in payments from China because “many Chinese banks are afraid of secondary sanctions while working with us.”

(Adapted from SCMP.com)

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