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China

Russia: still in the (RMB) game

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Days after China made the landmark decision to appoint a US renminbi clearing bank, it has made yet another clear political statement by appointing Industrial and Commercial Bank of China Moscow as Russia’s clearing bank, with a bond market link also in the making.

In a short announcement, People’s Bank of China (PBoC) said that following its memorandum of understanding with the Central Bank of Russia (CBR), it has decided to appoint ICBC Moscow to the role. This is ICBC’s seventh clearing bank appointment following the one in Argentina in September 2015, trailing Bank of China’s top position with 12 clearing bank roles.

China’s decision was also taken just three days after PBoC appointed Bank of China New York as US RMB clearing bank.

CBR said in a statement that the appointment of ICBC Moscow fulfils the agreement on clearing arrangements made in June this year.

“The establishment of Bank ICBC as the renminbi clearing bank is an important milestone in co-operation between China and Russia aimed at strengthening linkages between the markets of two countries,” CBR said. “The availability of renminbi liquidity on the Russian market will facilitate renminbi transactions settlement continuity and promote the use of the renminbi in cross-border transactions between companies and financial institutions.”

The Moscow Exchange (MOEX) told GlobalRMB through a spokesperson that ICBC's new status would also facilitate access to the Russian market for Chinese investors. 

"This is a necessary step towards developing settlement infrastructure for RMB operations not only on MOEX’s FX market, where the Chinese currency is the third most traded," the exchange said. "It will also create new opportunities for Russian Government and corporate borrowers seeking to issue bonds denominated in RMB."

MOEX noted that the appointment would also extend trading hours for trading of the CNY/RUB pair with same-day settlement and for overnight swaps. At the moment, the time difference limits trading of the instruments to just 45 minutes a day.  

Unlike the US, Russia’s central bank has already agreed on a bilateral currency swap line with China for Rmb150bn ($22.5bn) in October 2014, although Russia has yet to receive a RMB qualified foreign institutional investor (RQFII) quota. The US received the RQFII quota in June this year.

CBR added that the appointment could lead to further promotion of the RMB in Russia and beyond.

“[The] development of a renminbi market in Russia will contribute to the standing of Russia as a regional financial hub for renminbi transactions in Eurasian Economic Union.”

Meanwhile, a spokesperson for Russia’s National Settlement Depository confirmed media reports about plans by the central securities depository to establish a link with its Chinese counterparts and provide integration between the two bond markets.

“Indeed we are working closely with our colleagues to establish a link between our markets and provide both Russian and Chinese investors with direct and convenient access to the markets,” the spokesperson said.

The Hong Kong Exchange has also made plans for a China-Hong Kong Bond Connect initiative, but market participants have so far been sceptical about its chances of success.

Belt and Road

Beyond capital markets, China and Russia have seen increasingly close relations given China’s growing commodities demand, as well as joint initiatives on infrastructure projects such as the CBPC-Gazprom Power of Siberia gas pipeline initiative.

The launch of China’s Belt and Road Initiative (B&R), with its strong focus on infrastructure development across Asia, Middle East and Europe, means that the relationship could grow stronger. Russia has, in addition, joined the new Asia Infrastructure Investment Bank as a founding member, and it is also a founder of the BRICS New Development Bank.

But despite the steps taken so far, Russia’s economic difficulties in light of low commodity prices and Western sanction might continue to weigh on the prospects for greater co-operation

“China and Russia obviously expect to continue economically engaging in important ways,” said Rob Koepp, director, The Economist Corporate Network. “Nevertheless, the once high expectations and later sobering re-assessments of the showcase Russia-to-China oil pipeline provide reminders that fully realising the potential of [B&R] in Russia will require careful treading along this portion of the Belt and Road.”

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