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Print Edition> Business
UPDATED: December 17, 2010 NO. 51 DECEMBER 23, 2010
A New Way to Trade
China expands yuan settlement in trade with Russia, while allowing the yuan to trade against the ruble

CLOSER TRADE: Russian customers pick up goods at the China-Russia Mutual Trade Zone at Manzhouli, Inner Mongolia Autonomous Region. Trade between the two countries has been booming in recent years (REN JUNCHUAN)

Cross-border trade between China and Russia was bountiful throughout the 1990s as a group of Chinese and Russian dealers, nicknamed the daoye, or profiteers who buy low and sell high, shuttled consumer goods from China to Russia. These dealers, still around but far fewer in number today, should be rejoicing after the announcement of the latest progress in cross-border trade between the two countries: China and Russia have decided to settle their bilateral trade deals using the Chinese yuan and Russian ruble, bypassing the need to use the U.S. dollar.

The decision marked one of many fruits from the recent trip Chinese Premier Wen Jiabao made to Russia. Wen and Russian Prime Minister Vladimir Putin announced the direct yuan-ruble settlement on bilateral trade in St. Petersburg on November 23.

The direct settlement would save dealers of both sides the troubles of converting between three currencies—from the yuan, to the dollar, to the ruble and vice versa—and avoid losses in profits due to exchange rate differences.

It is just the beginning of breakthroughs in Sino-Russian bilateral trade. A day before the announcement, China began allowing the yuan to trade against the ruble, a seventh foreign currency, in the interbank foreign exchange market.

The Moscow Interbank Currency Exchange started trading the yuan against the ruble for the first time on December 15, making Russia the first country to do so in its interbank foreign exchange market.

"These measures are symbols of the deepening of Sino-Russian economic ties and will definitely promote the reform of the global monetary system," said Ding Zhijie, Dean of the School of Banking and Finance at the University of International Business and Economics.

The direct yuan-ruble settlement is expected to boost Sino-Russian bilateral trade, keep exporters and importers away from exchange-rate risks, and reduce their dependence on the U.S. dollar in settling payments. It is also hoped to bring win-win results for merchandisers and commercial banks from both countries.

But a number of factors could prevent the two countries from conducting monetary cooperation on a large scale, including the comparatively small Sino-Russian trade volume, the not yet fully convertible yuan, and the exclusion of energy products in the direct yuan-ruble settlement arrangement.

In addition, the yuan is only traded against the ruble in the spot exchange market between Chinese banks, and more complicated transactions such as forward transactions and swap transactions are not expected in the short term.

Bypassing the dollar

Sino-Russian trade grew rapidly from 1999 to 2008, increasing by nearly 30 percent annually. In the first 10 months of 2010, China became Russia's second largest trading partner; Russia is still one of China's top 10 trade partners. China's Ministry of Commerce estimated that Sino-Russian bilateral trade is expected to recover to its pre-crisis level, exceeding $50 billion this year.

Trade between China and Russia was largely settled in the U.S. dollar and the euro. The U.S. dollar was used in 85 percent of payments for Sino-Russian trade in 2008, according to customs statistics from Heilongjiang Province.

But the dollar has been sharply depreciating against major currencies since 2001. The U.S. Federal Reserve's recent quantitative easing policies in particular raised concerns over mounting risk in international trade settlements using the dollar and called into question the dollar's dominance in the world's monetary system.

In addition to increasing costs and risks with unstable exchange rates, China's and Russia's dependence on the U.S. dollar in bilateral trade settlements aggravated the imbalance in international trade settlements, while entailing losses to merchandisers of both countries.

"Direct yuan-ruble settlement will greatly reduce transaction costs and risks, and effectively mitigate the impact on both countries' foreign exchange rates and real economies from the financial crisis," said Li Fuchuan, a research fellow at the Institute of Russian, Central European and Central Asian Studies under the Chinese Academy of Social Sciences.

China made similar trade settlement arrangements with major countries to address problems with an unstable and depreciating dollar, said Shi Qiping, a commentator from the Hong Kong-based Phoenix TV.

The United States abused its right to print more dollars and continued the quantitative easing policy to fight the economic slowdown after the 2008 financial crisis, which has created excessive liquidity globally and increased hot money inflows into emerging markets, Shi said.

These inflows created pressures for emerging countries to appreciate their currencies and weakened the competitiveness of their exports. As a consequence of the U.S. excessive dollar issuance, China has suffered huge losses to its foreign exchange reserves.

"At present, China has to reduce its reliance on the unstable dollar, especially in trade settlements. That's why China is choosing to establish direct settlement with neighboring countries," Shi said.

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