Wed, Dec 24, 2014 - Page 15 News List

Ruble swap shows China challenging IMF as lender

EMERGENCY LOANS:Beijing’s willingness to extend credit to nations shut out of overseas capital markets is also bolstering its influence in the global economy

Bloomberg

Communist Party supporters dressed as white bears yesterday saw through a replica of a Russian ruble coin during a protest against government policies, in front of the parliament building in Moscow.

Photo: EPA

China is stepping up its role as the lender of last resort to some of the world’s most financially strapped countries.

Chinese officials signaled on Saturday that they are willing to expand a US$24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. China has provided US$2.3 billion in funds to Argentina since October as part of a currency swap, and last month it lent US$4 billion to Venezuela, whose reserves cover just two years of debt payments.

By lending to nations shut out of overseas capital markets, Chinese President Xi Jinping (習近平) is bolstering the country’s influence in the global economy and cutting into the IMF’s status as the go-to financier for governments in financial distress.

While the IMF tends to demand reforms aimed at stabilizing a country’s economy in exchange for loans, analysts speculate that China’s terms are more focused on securing its interests in the resource-rich countries.

“It’s always good to have IOUs in the back of your pocket,” Morten Bugge, chief investment officer at Kolding, Denmark-based Global Evolution A/S who helps manage about US$2 billion of emerging-market debt, said by telephone. “These are China’s fellow friends and comrades, and to secure long-term energy could be one of the motivations.”

The ruble jumped 4.9 percent to 55.8 per US dollar in Moscow on Monday after Hong Kong-based Phoenix TV cited Chinese Minister of Commerce Gao Hucheng (高虎城) as saying that expanding the currency swap between the two nations would help Russia.

The ruble has gained 10 percent over the past two days, paring a selloff that has made it the world’s worst performing currency over the past six months.

Unlike Ukraine, where the pro-west government received a US$17 billion IMF-led bailout this year, Russia, Argentina and Venezuela are often at odds with the US and its allies, essentially keeping them out of the reach of the Washington-based institution. At US$3.89 trillion, China holds the world’s largest foreign-exchange reserves, allowing it to fill the void.

China and Russia signed a three-year currency-swap line of 150 billion yuan (US$24 billion) in October, a contract that allows Russia to borrow the yuan and lend the ruble.

While the offer will not relieve the main sources of pressure on the ruble — which has lost 41 percent this year amid plunging oil prices and sanctions linked to Russia’s annexation of Crimea — it could bolster investors’ confidence in the country and help stem capital outflows.

In Venezuela, President Nicolas Maduro last month added US$4 billion he borrowed from China to the country’s reserves after they fell to an 11-year low. The country now has about US$21 billion in its coffers, equal to the amount of debt it has coming due next year and in 2016.

Venezuela, which was already plagued by shortages of everything from toilet paper to toothpaste, is also suffering from the drop in oil, its biggest export. Traders are betting that there is an 89 percent probability that Venezuela will not be able to make good on its debts over the next five years, according to credit-default swaps data compiled by Bloomberg.

“I don’t think this is a broad policy to support any country that asks for Chinese help,” Steffen Reichold, an economist at Stone Harbor Investment Partners in New York, said in an e-mail. “Several countries are currently in a tight spot and the Chinese are offering to help. That buys them some goodwill and influence, and promotes the use of the yuan.”

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