How will the plummeting rouble affect China?

A woman walks past boards showing currency exchange rates in Moscow, Dec 16, 2014.[Photo/Xinhua] 

The Russian rouble depreciated by more than 25 percent last week, defying the Russian central bank's effort as to hike interest rate. Moscow resorted to its last resort – selling foreign reserves – to defend its currency. In response, the rouble rebounded by 7 percent to reach below 63 against the US dollar and in the meantime, the Russian RTS index recovered by 12 percent. So how will this wave of rouble depreciation affect China?

China-Russia currency swap deal

The public may be concerned over the China-Russia currency swap deal signed on Oct. 13, thinking the depreciating rouble may cause loss to China. But experts clarified the deal is a backup scheme and there has not be actual currency swaps taking place.

The swap deal, which has a maximum quota of 150 billion yuan over 815 billion roubles, is effective for three years, but extendable upon agreement. A financial expert at the People's Bank of China, China's central bank, noted that the currency transfers would only take place when one side initiates a swap, meaning that no losses will occur when such swaps did not actually happen.

In addition, the same expert said that the initiator of a currency swap should stick to the exchange rate of the day when the actual transaction takes place – instead of a fixed rate – and return the same amount of currency plus interest.

In other words, if Russia swaps a sum of roubles with the equivalent value in Chinese yuan, Russia has to return the same amount of yuan upon the deadline as well as the interest. This will not involve any exchange rate risk for China.

Geely in profit warning

Geely Automobile expects its 2014 net profit to halve from 2.66 billion yuan (US$430 million) in 2013, as a result of the rouble's slump, the company said in a statement on the Hong Kong Stock Exchange.

Apart from Geely, Great Wall Motors, Chery Automobile, Lifan Industry, JAC Motors and BYD are among the worst hit Chinese automakers that suffered from the changes in the Russian market.

The same chill is being felt by Chinese running business in Russia. Ms. He, who engages in fishing kits and outdoor outfits in St. Petersburg told the Beijing News that most Chinese businessmen, mainly in the clothes and home appliance trades, are suffering huge losses as the rouble dives.

According to her, most local Chinese businessmen were stuck in the dilemma of whether or not undersell their goods. "Underselling means a loss but hoarding means an even huger loss," she said.

Good time for Chinese oil importers?

The slumping rouble may be a nightmare for Chinese exporters, but it is good news for oil companies, along with consumers of crude oil products, and industries, such as aviation, and the downstream.

Xi Jiarui, an analyst at 315.com.cn, an online e-commerce platform, said that all the industries in the crude oil sector will profit in the current wave of rouble depreciation. Oil importers will enjoy lower prices, while end users will not have to pay as much. Ms. Xi also said that by raising tax on fuel prices, the local government will generate more revenue.

China-Russia oil deals

When the Brent oil price dipped lower than US$60 for the first time in the past five years, Russia, which heavily relies on oil exports, is bound to suffer, evident in its slumping currency.

Although Beijing and Moscow have signed two major crude oil deals since last year, when oil prices were much higher, China will not sustain heavy losses, contrary to the view held by many; instead, the depreciating rouble will bring more benefits to China.

Li Yan, an analyst at the Longzhong Petrochemical Information Network, noted that prices in long-term deals fluctuate to allow both parties to negotiate within a reasonable range; this is why China does not have to stick to a constant price. Apart from importing Russian crude oil at a much lower price, the slumping oil price and depreciating rouble will give China more bargaining power in bilateral business negotiations with Russia.

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