(Bloomberg) -- Russia’s central bank called for restraint in issuing corporate loans denominated in yuan after the country’s two biggest lenders urged action to alleviate a deficit of the Chinese currency.
The banking sector should limit lending growth in foreign currency to stabilize the situation given that sanctions are in place, the Bank of Russia said in a report Friday. Since late 2023 banks have been increasing corporate lending in yuan, reducing their liquid assets in the currency, it said.
The heads of state-run Sberbank PJSC and VTB Bank PJSC said on Thursday that additional discussions were needed with the central bank to alleviate the shortage of yuan liquidity on the Russian market. Short-term yuan borrowing rates surpassed 200% as banks need to cover their open currency positions, Herman Gref, Sberbank’s chief executive officer, was cited as saying by local media at an economic forum in Vladivostok.
China has become Russia’s main trading partner as sanctions over the invasion of Ukraine forced the Kremlin to reroute foreign trade flows and switch to “friendly” currencies such as the yuan from the dollar or euro. “The increase in yuan lending was partly caused by the replacement of loans in ‘toxic’ currencies, but 41% of the increase was down to new currency loans,” the Bank of Russia said.
The US tightened restrictions this year, which helped curb the flow of yuan to Russia. Chinese banks stopped servicing foreign trade payments with Russian counterparts in view of potential penalties for indirectly funding President Vladimir Putin’s war machine.
The gap in yuan liquidity has been covered so far by the central bank via its swap instrument. Increased volumes showed that the yuan shortfall doubled in August and has intensified this month.
VTB CEO Andrey Kostin suggested that the Bank of Russia may provide more liquidity through its short-term swaps, the RBC news outlet reported Thursday. But the Bank of Russia said in the report on financial market risks that the swaps serve only as a short-term “stabilization mechanism” for the domestic market and can’t be used as a permanent source of funding.
According to the Bank of Russia’s monitoring data, a quarter of surveyed exporting companies faced difficulties in settlements with foreign counterparties in July 2024. They reported frequently facing issues with the time it took to settle, as well as payments being blocked or returned when transacting in currencies of so-called friendly countries. At the same time, about half of those polled reported that situation had become worse in the second quarter compared with the first quarter of 2024.
“One could assume that exports from Russia to China are going smoothly, but the main issue - payments - is putting pressure on Russian exporters, and large ones too,” Alexander Zainigabdinov, head of China Window Consulting Group in Beijing, said at the Eastern Economic Forum.
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