Commentary on Political Economy

Monday 4 September 2023


China banks: ren­minbi for Rus­sia

Thank You for Being a Friend was the theme song of 80s sit­com The Golden Girls. It mer­its a reboot to accom­pany China’s bil­lions in lend­ing to Rus­sian banks. Rus­sia badly needs external fin­an­cial coun­ter­parties. The west has cut most such ties.

What suits Beijing in its mis­sion to pro­mote the ren­minbi could end up hurt­ing Chinese banks.

China’s expos­ure to Rus­sia’s bank­ing sec­tor quad­rupled in the 14 months to the end of March this year. The coun­try’s largest banks, Indus­trial and Com­mer­cial Bank of China, Bank of China, China Con­struc­tion Bank and Agri­cul­tural Bank of China increased lend­ing to Rus­sia to $9.7bn from $2.2bn.

China has not par­ti­cip­ated in the bliz­zard of sanc­tions imposed on Rus­sia by west­ern and Asian demo­cra­cies. Indeed, smal­ler China banks have strengthened ties with Rus­sian cli­ents.

Big Chinese banks have typ­ic­ally dis­tanced them­selves from Rus­sia. Some stopped lend­ing in response. When Rus­sian com­pan­ies star­ted using the ren­minbi to cir­cum­vent sanc­tions, some Chinese lenders even restric­ted trans­fers from Rus­sia.

China’s grow­ing Rus­sian loan expos­ures smack of policy imper­at­ives. China resents the dol­lar’s hege­mony. It has for years been try­ing to boost the ren­minbi’s mar­ket in trade with hopes it could become a reserve cur­rency too.

Last year, the ren­minbi sur­passed the dol­lar as the most traded cur­rency in Rus­sia. Dol­lar set­tle­ment of Rus­sian exports plunged and trade with China hit a record $185bn. This has bolstered China’s hopes that Rus­sia could adopt the ren­minbi as a reserve cur­rency.

Chinese loan expos­ure to Rus­sia remains small at less than $10bn. Any defaults would have neg­li­gible impact. ICBC has total assets of about $5.7tn, the largest in the world.

So far, the west has steered clear of sec­ond­ary sanc­tions on unaligned nations. But these remain a tail risk for Chinese busi­nesses deal­ing with Rus­sia. They could yet become a real­ity if, for example, Rus­sia resorts to bat­tle­field nuc­lear weapons.

Chinese banks that went on lend­ing could then find them­selves cut off from all sources of dol­lar liquid­ity. That would be pain­ful for a sec­tor already dis­rup­ted by real estate chaos.

The theme tune for the China-Rus­sia lend­ing love-in would then be Thanks for the Memory.

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