Ruble to circulate in Chinese city

China's decision to allow the circulation of the Russian ruble in a border city will strengthen bilateral economic ties and pave the way for direct exchange between the two currencies, analysts have said.

China has authorized Suifenhe City on the China-Russia border in Heilongjiang Province, as a pilot zone where the ruble can function alongside the yuan. The ruble can be freely deposited and withdrawn at local banks. People in Suifenhe can pay their bills with rubles.

It is the first time since the founding of the People's Republic of China that a foreign currency has been allowed to function on a par with the yuan on the Chinese mainland.

Zhu Jianfang, chief economist at Citic Securities, said Monday the move will promote bilateral economic and financial cooperation as Suifenhe is a key channel in China-Russia trade.

Suifenhe established a border trade district in the late 1980s which has developed rapidly since.

China has facilitated the trade, with the latest moves allowing Russian passports holders to visit Suifenhe's border trade district for up to 15 days without visas, starting from December.

Zhu said the new policy will help price discovery in the formation of an exchange rate between the yuan and the ruble, and help create a direct exchange rate between the two currencies at a later date. The move could lay the foundation for subsequent circulation of the yuan in some Russian cities.

With more use of the yuan abroad, yuan credit will be enhanced, leading to globalization, Zhu said.

Tan Yaling, president of the China Forex Investment Research Institute, warned of possible arbitrage in the border city following the influx of a large amounts of rouble.

Tan said local regulatory bodies should monitor the flow of the Russian currency and make sure that the new policy serves the interests of the real economy, instead of fueling arbitrage.

China Foreign Exchange Trading System announces the central parity rates of the yuan against nine major currencies, including ruble, every day. The daily central parity of the yuan against the U.S. dollar is based on a weighted average of inquired prices from market makers before the opening of the market. The central parity against other major currencies is based on the U.S. dollar rate and the exchange rates of the eight currencies against the U.S. dollar in the international foreign exchange market.