After the West imposed sanctions against Russia, the dollar and the euro became essentially toxic currencies. However, new financial products soon began to appear on the market with another friendly currency – the Chinese
Will the yuan become an alternative to traditional Western currencies for savings, travel and speculative investment?
New renminbi products have started to appear in the market, although this is not yet a mass phenomenon. The yuan is gaining momentum on the Moscow Exchange, and the first companies have appeared that offer to lend in yuan. And for ordinary citizens large banks have already started to open deposits in yuan, for example, Alfa Bank has opened deposits at 1.5% per annum. This is the maximum rate for foreign currency deposits among major Russian banks. To get such a high rate, you have to choose a one-year deposit of 500 yuan and more.
“With zero or even negative rates on reserve currencies, the current yield of 1-2% per annum on RMB deposits at Russian banks looks satisfactory. In addition, we are witnessing a rather sharp reduction in the size of the key rate of the Central Bank of Russia – and, as a consequence, the yields on ruble deposits are also rapidly declining,” says Vladimir Evstifeev, Head of the Analytical Department of Bank ZENIT.
Until recently, ordinary Russians often kept their savings in dollars and euros. However, after February 24, everything changed. Unfriendly countries froze part of the Russian Central Bank’s foreign currency reserves, imposed more than 10,000 sanctions against Russia, and disrupted supply chains. Because of the imbalance between supply and demand, the rouble strengthened against the dollar as much as 50 roubles.
“Given that the Central Bank of Russia does not allow withdrawal of cash currency and banks impose commissions on foreign currency accounts of unfriendly countries, the yuan can be used instead of the dollar and the euro. You only need to buy it on the Moscow Exchange at a favorable exchange rate,” said BitRiver financial analyst Vladislav Antonov.
The yuan is a good substitute for the dollar and euro, but not for deposits at banks, he said. “Now the Central Bank and banks are doing everything to get Russians to start selling currency, as risks of sanctions against the Moscow Exchange and the National Clearing Centre (NCC) have increased. If this happens, all clients’ funds in the NCC will be frozen and trading in dollars and euros on the Moscow Exchange will stop. Many have already started selling currency and buying yuan immediately. It is a pity that there is no way to buy yuan for foreign currency. We’ll have to go out into the ruble and then buy the yuan,” he says.
“The Chinese yuan, like other currencies, is subject to sharp price fluctuations amid geopolitical risks. With increased volatility, the deposit can both decrease when the yuan weakens and increase from its appreciation,” Antonov said. Now it is geopolitics – China’s decision on Nancy Pelosi’s arrival in Taiwan – that could put serious pressure on the Chinese currency.
“Products in yuan for Russians are now unattractive because banks will convert rubles to yuan at an unprofitable rate. You may lose more than 15% on the conversion, and the interest on the deposits is low,” says Antonov. The biggest drawback is a big difference between the difference between buying and selling in banks.
“Deposits in yuan have absolutely the same problem as deposits in other currencies: some Russian banks already charge commission on foreign currency deposits which can even lead to withdrawal of your interest to zero. In addition, this year the yuan is not the most attractive currency for savings, its exchange rate against the ruble has fallen by more than 11% since the beginning of the year,” says Natalia Milchakova, lead analyst at Freedom Finance Global. The risk-free option for ordinary Russians remains a ruble deposit, Antonov said.
Savings in Chinese currency could be a good option for diversifying savings (i.e., the yuan is not the only currency), said Andrey Maslov, analyst at Finam Group. However, it should be understood that the yuan is still a partially convertible, risky currency of a developing country with non-transparent legislation, he adds.
In addition, economists are concerned about the Chinese real estate market’s credit crunch, which could lead to a “mortgage crisis”. Specialists S & P Global Ratings believe that China’s banks could lose $ 356 billion if citizens massively boycott payments on mortgages. That’s 6.4% of all mortgages in the country. Citizens have already started refusing to pay in July because property delivery deadlines have been persistently delayed, all over China. And the property market plays a key role for the country’s financial system. Banks have a very large proportion of mortgage loans; some have as much as a third of the total portfolio. Risks from the mortgage crisis are not good for the Chinese currency.
Ordinary Russians have used dollars and euros not only to save, but also to travel. Here again, experts advise staying in Western currencies. “You can lose a lot of money on conversion from different currencies. It is better to calculate everything manually first, and then make decisions,” says Antonov. To travel to Turkey, where Russians traditionally holiday, it is better to have the same rubles, Maslov believes.
Meanwhile, investors are becoming more interested in the Chinese currency. “Exchange speculators were previously very active in trading on the Moscow Exchange in the US dollar and euro, while there was little interest in the yuan because this currency does not have high liquidity and is not distinguished by strong rate volatility, i.e. it is difficult to profit from the exchange rate difference in the yuan, unlike the dollar or euro.
However, at the moment, currency traders’ interest in the yuan has increased significantly due to restrictions by Western central banks against Russia. So the situation could change in favour of the renminbi. As the budget rule returns and renminbi purchases from the FNB begin, speculators’ interest in the Chinese currency will increase significantly,” Milchakova said.
The yuan has become the third most active currency on the Moscow Exchange in a relatively short period of time, behind only the dollar and the euro in terms of trading turnover. “It is possible that the yuan is capable of overtaking the euro in terms of currency trading activity in the next couple of months,” says Evstifeev. The infrastructure for investing the yuan in the Russian market is just beginning to take shape, so there are not many opportunities for investing the Chinese currency. Nevertheless, the process is under way.
The first offers from issuers to borrow in yuan are already appearing on the Russian bond market. Rusal, for example, recently offered investors RMB bonds at 3.9 per cent per annum on a two-year horizon. “It is likely that other large Russian companies will also prefer to borrow in yuan,” Yevstifeev did not rule out. The ruble has stopped actively strengthening against the yuan and is likely to weaken against the Chinese currency to 9.5-10.5 rubles (by 10-20%) by the end of 2022, he expects.
“The yuan has a future in the Russian market, it has already caught up with the euro in terms of turnover on the Moscow Exchange. But as a global currency, the yuan is unlikely to take hold in the next few years. Don’t assume that the dollar and the euro will be permanently ousted from Russia. Yet both of those currencies have a dominant position on world markets,” concludes Finam’s Maslov.
Olga Samofalova, VZGLYAD