Yuan's share on Russian forex market rises to 39.2% in May, share of 'toxic' currencies dips to 59.4% - Central Bank

MOSCOW. June 13 (Interfax) - The share of the yuan on the Russian forex market rose to 39.2% in May from 36.1% in April, while the share of so-called "toxic" currencies dipped to 59.4%, the Central Bank of Russia (CBR) said in the latest review on financial market risks published on its website.

Specifically, the share of the U.S. dollar in the volume of transactions has renewed its decline, dropping to 43.7% in May from 44.5% at the end of April, and the share of the euro decreased to 15.7% from 17.8%, respectively.

The share of the yuan in export and import transactions, respectively, continued to rise, growing to 23% and 31% in April from 18% and 27% in March.

Monthly export earnings in the Chinese yuan rose to $7.2 billion from $6.9 billion, respectively, and import payments grew to $7.9 billion from $7.7 billion, respectively.

The importance of the currencies of friendly countries on the Russian forex market, foremost the yuan, continues to grow, the report said. However, in the course of the structural transformation that began in 2022, imbalances periodically occur in the supply and demand for certain currencies, which sometimes leads to a temporary shortage of corresponding forex liquidity.

One of the common indicators for assessing the situation with yuan liquidity on the domestic market is indicative exchange rates of swap transactions that are published on the official website of the National Clearing Center (NCC) in a breakdown by currency pairs. The indicator for each currency pair is calculated as the weighted average swap difference of forex swap transactions conducted with these currencies in the course of the day on the Moscow Exchange. Nonetheless, directly using the indicative rate of swap transactions does not make it possible to assess the tightness of forex liquidity on the market, as it depends on the cost of raising both currencies involved in the swap, meaning interest rates for them. For example, given that the ruble interest rate is higher than the yuan rate, even in a neutral situation with yuan liquidity the swap difference will be a positive value.

CBR experts believe that the correct version of the quantitative indicator for the cost of yuan liquidity is the difference between the ruble interest rate (such as the RUONIA) and the indicative rate on CNY/RUB swaps, or the swap difference in interest rates. This indicator reflects the cost of yuan liquidity in Russia and makes it possible to directly assess the liquidity situation on the market - the bigger the difference, the worse the situation with yuan liquidity.

If the calculated difference exceeds the cost of yuan on the Chinese market (SHIBOR), it indicates a yuan liquidity shortage on the Russian market. This was the case from April to the middle of May 2023, which could have been due to demand for yuan to pay for imports. At the moment, the situation on the market is balanced, the CBR said.

The concentration of participants on the CNY/RUB swap market differs significantly on the side of demand and supply. There are virtually no large positions for placement of yuan for rubles, the supply of yuan is spread among participants. But demand for yuan is generated by a smaller number of credit institutions and on some days only some of them raise an amount of yuan that is comparable to supply from the ten largest market participants.

Such a high concentration of demand increases the sensitivity of the market's yuan liquidity to the liquidity management policy of certain participants. Among other things, participants who raise the largest amounts of yuan may place them in accounts at Chinese non-resident banks for a time, including for the purpose of financing imports.

Thus, obtained yuan are not invested in yuan assets, such as loans and bonds, on the domestic market, but are moved out of Russia to foreign accounts, leading to shortages of this currency on the domestic market. Meanwhile, raising onshore yuan is also limited due to currency controls in China. As a result, market participants turn to the CBR to provide yuan for rubles in overnight forex swaps, and the number of such transactions has increased recently. For example, lenders raised a record 51.6 billion rubles in yuan from the CBR on May 5, the report said.