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China and Russia reach a Framework Agreement on Local currency settlement Foreign Media: impact on US Dollar hegemony
Jul 2,2019
Source:Reference message network
The content below was translated by Tencent automatically for reference.

SMM News: July 1 reported by foreign media that China and Russia agreed to mutual settlement of the local currency transition to "consolidate national security." The rouble and the renminbi will provide payment services for trade between the two neighboring powers.

Positive layout between China and Russia

According to a report on the website of Russia's "expert" Weekly on June 28, it was learned on June 28 that Russia and China signed an intergovernmental agreement on the transition to local currency settlement in June. According to the Izvestia, the State Duma questioned the Ministry of Finance and received the news in its reply. Sources close to the Russian central bank confirmed the news.

According to the report, Anatole Akasakov, chairman of the Financial Market Committee of the State Duma, asked what measures had been taken to promote the settlement of local currency between Russia and its economic partners to consolidate the country's economic security. Sergei Stolchak, deputy finance minister, subsequently signed a reply.

Akxakov told the media that in order to expand the size of local currency settlement, it is necessary to establish a ruble and RMB financial instruments market. This will help avoid the risk of exchange rate fluctuations. He estimates that the proportion of Chinese rouble settlement could rise from the current 10 per cent to 50 per cent in the coming years.

According to the report, Alexander Osing, a business management analyst for the Russian securities market of the Russian Free Finance Corporation, pointed out that at present, China accounts for about 15 percent of Russia's foreign trade. By mid-2018, the renminbi also accounted for nearly 15 per cent of the central bank's gold foreign exchange reserves. By contrast, Europe accounts for almost 44 per cent of Russia's gold foreign exchange reserves and the euro accounts for almost 44 per cent of Russia's foreign trade. As a worldwide currency, the euro is actively used by banks as a tool to provide loans and allocate deposits. On the other hand, according to the Russian Business Consulting Daily, the use of RMB in bilateral trade between Russia and China is only 17%. The data also roughly reflect the relative liquidity of the renminbi in the Russian market.

Experts said that according to the Russian Ministry of Finance, it is planned to formulate a "new mechanism" for mutual settlement of local currencies between Russian and Chinese enterprises under the framework of the agreement signed. In fact, this has been done before, but it is now formally fixed in the form of an agreement. In other words, the ruble and RMB settlement scale is expected to accelerate growth.

According to reports, from the current state of the Russian banking system, if there is no external shock, the bank's rouble currency position could increase by about 5% to 10% a year. Experts believe that this indicator reflects the possible medium-term rate of de-dollarization of the Russian economy without macroeconomic stimulus.

The system still needs to be improved.

Alexei Antonov, an analyst at Aloor Brokerage, points out that while the rouble is generally calculated directly on the basis of supply and demand for foreign exchange transactions, financiers know that this is still an arbitrage exchange rate. The two currencies are linked to each other through the dollar. The ruble is often paid slightly less than the renminbi, now at 10 per cent and 15 to 20 per cent, respectively, but the rest of the transactions are paid in dollars (about 70 per cent).

Experts believe that if profitable, companies will immediately and completely switch to rubles or RMB payment. But they did not do so because of the obvious seasonal characteristics of Sino-Russian trade: Russia is prone to a surplus in the first half of the year and China in the second half of the year. In order to maintain the stability of the exchange rates of the two currencies, the government needs to come forward to buy the RMB and the rouble.

Reported that at present, the rouble-RMB settlement either accounted for a small proportion or in accordance with the state contract.

In addition, according to a report by Tass News Agency on June 29, the Russian-Chinese agreement on local currency settlement is still only a framework agreement, and the subsequent two sides still need to discuss financial architecture, payment path, information technology, and other issues. Russian Deputy Finance Minister Stolchak told reporters.

"this is a framework document on which issues such as financial architecture, payment routes and information technology will be discussed," Mr Stolchak said. " He also said that it was not yet possible to determine the exact date on which the mechanism would actually begin to operate.

It is reported that Kirill Dmitriev, chief executive of the Russian Direct Investment Fund, has previously revealed that a considerable portion of Russia-China trade has been settled in local currency, and the number of global transactions using the Global Interbank Financial Communications Association system has decreased by 5 per cent in the past year and a half.

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