China is closely monitoring the slide in the Russian ruble, according to the State Administration of Foreign Exchange (SAFE). The Chairman of the Chinese foreign exchange regulator shared this important, but not very surprising, insight in a news conference in Beijing today.
Chinese officials must be following closely the state of the Russian currency and economy as Russia is not only one of China’s biggest energy importers, but it might also fall back on its massive ¥150 billion currency swap agreement with China if the ruble continues to plunge and all liquidity evaporates from global markets.
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The swap allows the central banks to directly buy yuan and ruble in the two national currencies rather than via the US dollar. The deal was signed by the Central Bank of Russia and the People’s Bank of China in October when the Chinese Premier, Li Keqiang, visited his large oil producing northern neighbor. The Chinese central bank already has such currency swap deals with more than twenty other monetary authorities around the world.
If the Russian swap deal is activated for this purpose now, it would mark the first time China was called upon to use its currency to bail out another country’s currency in crisis. At the time, sources close to the People’s Bank of China said it was meant to reduce the role of the US dollar if China and Russia will need to help each other overcome a possible liquidity squeeze like the one Russia is facing now.
The ¥150 billion ($24.1 billion) swap might not be enough for Russia even if it is used in its entirety considering Russia’s current state. It will be used as a way of showing China’s commitment to Russia and its own growing financial clout in the world. The Chinese might also try to use it to secure a better long term deal on oil for themselves when Russia is at its weakest point in years.