China and Russia are now able to use domestic currencies in trading, as the countries attempt to reduce the importance of the US dollar in international trade, as well as decrease FX risks.
The RMB 150 billion bilateral currency swap agreement, which was first signed in October and allows the central banks to directly buy renminbi (RMB) and ruble (RUB) in the two currencies, rather than via the US dollar, came into force on 29 December.
Starting from this date, China has launched trading in forward contracts and swaps between RMB and RUB via the China Foreign Exchange Trade System (CFETS). China also launched trading contracts with the Malaysian ringgit and the New Zealand dollar, bringing the number of currencies able to directly trade RMB swaps on the interbank foreign exchange market up to 11.
This announcement follows just days after two Chinese ministers voiced their support for Russia, as President Vladimir Putin attempts to prop up the ruble without running down the country’s FX reserves. The RUB has fallen about 45 percent against the USD this year, according to Reuters.
On 20 December, Foreign Minister Wang Yi reportedly said that China will provide help if needed and is confident Russia can overcome its economic difficulties. Commerce Minister Gao Hucheng added that expanding a currency swap between the two nations and making increased use of RMB for bilateral trade would have the greatest impact in aiding Russia.
Gao said China and Russia were capable of achieving this year’s trade target of $100 billion. Last year, trade between the two gained 1.1% at $89.2 billion, according to Chinese customs data.
Both countries have been looking for ways to cut the dollar’s role in international trade. Currently, 32%, or $4 trillion of China’s foreign exchange reserves are in US dollar instruments, whereas Russia holds $162.45 billion in USD, or 41% of its FX reserves.