Why isn't China letting Russia take out yuan loans in their 'no-limits' partnership?

In long-running discussions with China over whether Russia will be allowed to take out loans in the yuan, the lack of any formal decision could boil down to Beijing adopting a measured approach amid international scrutiny over its relationship with Moscow against the backdrop of the two-year-old Ukraine war, according to analysts.

In recent days, more Chinese firms were sanctioned by the Western world amid accusations that they have aided Russia in its war, through business connections.

Restricted from Western financial networks and the US dollar, Russia has turned to its southern neighbour with whom it boasts a "no-limits" partnership, and has thereby embraced greater use of the Chinese yuan as their financial cooperation has intensified.

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In an interview with the state-run RIA Novosti news agency on Monday, Russian finance minister Anton Siluanov said that his nation's budget laws would allow for it to issue loans in yuan, and that "negotiations with Chinese partners have been ongoing for quite some time" but no decisions had been made.

Dong Jinyue, a senior economist at BBVA Research, said that while enhanced ties on the financial front between the two countries could help internationalise China's currency, Beijing also tends to play it safe when upholding its "neutral stance" regarding the Ukraine war.

"Chinese commercial banks should also consider the safety and returns of yuan loans to Russia, beyond political considerations," she added. "For instance, what is the risk premium, given the ongoing Russia-Ukraine war, and how would they hedge the currency risks given the large volatility of the Russian rouble?"

Dong noted that the relatively weak financial market in Russia, coupled with an underdeveloped financial infrastructure - including for cross-border yuan settlements and products - are other challenges for both sides to work out in terms of allowing Russia to take out yuan loans.

And Li Lifan, a Russia and Central Asia specialist with the Shanghai Academy of Social Sciences, said that while Russians are willing to widely spend yuan domestically, "there is a need to think deeply about whether their consumption power can persist."

The transaction rate between the rouble and yuan is high, with the Chinese currency accounting for one-fourth of Russia's exchange reserves, Li noted, while Russia can also use the yuan to exchange for US dollars.

However, "the creditor is always the party that has more concerns than the debtors in any loan business", he said.

A total of 17 companies from mainland China and Hong Kong were among more than 500 targets of fresh sanctions imposed on Friday by the United States, which accused them of shipping equipment to Russia or otherwise providing it with support in its war effort.

In response, China's Ministry of Commerce said that the US was launching "unilateral sanctions through economic coercion".

"The Chinese side strongly opposes such behaviours," commerce authorities said in their official statement. "[The US] has violated international order and disrupted the stability of the global supply chain."

The Ministry of Foreign Affairs also said that Beijing would carry out "necessary measures" to defend Chinese companies.

"Russia and China are engaged in normal bilateral trade and economic cooperation," foreign ministry spokeswoman Mao Ning said at a regular press conference on Monday. "[We] don't target third parties and won't be disturbed by any other third parties."

Beijing and the Kremlin saw their bilateral trade, mainly in oil and gas, hit a record high of US$240 billion last year, and Chinese companies entered the Russian market where Western companies pulled out.

On the financial front, both signed audit and supervision deals to facilitate bilateral capital flows and bond issuance in December.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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