China welcomes bigger role for yuan in de-dollarised Russian sovereign wealth fund

Moscow’s move reflects confidence in Chinese economic development, foreign ministry says
Drive to shed US currency comes as both countries come under American sanctions pressure

China-Russia relations

Karen Yeung

Published: 5:29pm, 10 Jul, 2021

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China has welcomed Russia’s efforts to give the yuan a bigger role in its sovereign wealth fund, saying it reflected Russia’s confidence in China’s economic development and the prospects for cooperation between the two countries.

Chinese foreign ministry spokesman Wang Wenbin said on Friday that China would continue to deepen mutually beneficial cooperation with Russia, firmly support each other in international and regional affairs, and safeguard the common interests of the two countries.

The support came after Russia’s US$186 billion sovereign wealth fund said last week that it had completed a plan to cut its US dollar holdings to zero and boost holdings denominated in yuan and euros as part of efforts to reduce its vulnerability to US sanctions.

Russia’s Finance Ministry said that as of July 5 the yuan accounted for 30.4 per cent of the National Wealth Fund’s holdings, while almost 39.7 per cent was in euros. It also cut the share of British pounds to 5 per cent and raised the amount in gold to 20.2 per cent.

Finance Minister Anton Siluanov last month announced plans to sell the remaining US$40 billion in US dollar assets from the fund’s portfolio. The decision is in line with actions by the Bank of Russia, the central bank, which has dumped dollar-denominated reserves in favour of gold.

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Countries like Russia and China are shedding their dollar assets as their officials and institutions face US financial sanctions for not complying with US foreign policy.

The dollar’s dominance in the global financial system gives US regulators enforcement power to track and control money flows in and out of US banks, granting them unique capacity to impose sanctions to restrict activities of criminals.

Last week, Russian President Vladimir Putin reportedly unveiled a new national security policy that aims to balance its ties with China and India while cutting its dependence on US dollar-based transactions in Russia’s foreign trade.

Amid mounting foreign sanctions and pressure in recent years, the dollar’s share of the Russian central bank’s international assets had fallen to as low as 20 per cent compared to around 60 per cent of Russian exports, 40 per cent of Russian imports, 60 per cent of Russian foreign debt and 45-65 per cent of Russian international private assets, according to ING Bank.

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Meanwhile China is pushing ahead with efforts to globalise the yuan by launching a pilot digital yuan programme and setting up a joint venture with SWIFT.

Goldman Sachs economist Danny Suwanapruti said it would likely take many years to improve the yuan’s standing as an international currency.

But given the higher yields and lower correlation to core markets of yuan assets, the return on a portfolio of yuan bonds usually exceeded other traditional reserve assets.

Suwanapruti forecasted the yuan’s share of global central bank reserves to rise to 6-7 per cent over the next five years, up from 3.4 per cent in the first quarter. Combined with an assumption of 4-5 per cent annual reserve growth, this equates to around US$350-450 billion of cumulative yuan inflows over the next five years.

“Based on these projections, the yuan could represent around 5-6 per cent of total central bank reserves within the next eight years and yuan could potentially be the third-largest reserve currency in the world by 2030,” Suwanapruti said.

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Beijing’s action against the country’s dominant ride-hailing app, Didi Chuxing, also points to further US-China financial decoupling.

Just days after an IPO in New York, Chinese authorities last week ordered Didi’s app to be pulled from Chinese app stores, underscoring a serious threat that Chinese tech giants would not be able to stay on US exchanges for much longer, analysts said.

The US Public Company Accounting Oversight Board next week is also set to issue a ruling on all Chinese companies listed in the US which have not yet submitted to its auditing oversight, which could result in a stampede of delistings in New York.

“The amount raised on US exchanges by Chinese firms since 2000 is about the same as the amount they have raised on domestic exchanges just this year,” said Mark Williams, chief Asia economist at Capital Economics. “But the apparent desire to sever one of the few US-China links that has continued to thrive still feels like a milestone in decoupling.”