China keeping close eye on ruble

SAFE urges firms to hedge against risk

China is paying close attention to Russia's beleaguered currency, the State Administration of Foreign Exchange (SAFE) said Thursday, while pledging to proceed with reforms of the yuan's exchange rate regime.

There are complex reasons behind the slide in the ruble, "the impact of which, overall, has yet to be fully manifested and remains to be evaluated," Wang Yungui, head of the Policy and Regulation Department at SAFE, the country's foreign exchange regulator, told a news conference in Beijing.

Wang also said that domestic enterprises and organizations should make appropriate use of forward and swap facilities to hedge against risks.

While the tumbling ruble may not exert any direct influence on the yuan as China is still subject to capital controls, Chinese firms with operations in Russia will face substantial risks if they do not use any hedging facilities, Liu Dongliang, a senior analyst with China Merchants Bank in Shanghai, told the Global Times on Thursday.

The majority of Chinese businesses engaged in exporting goods to Russia have already suffered big losses due to the ruble's free-fall, Zhou Liqun, vice general manager of China Chengtong International Investment, told the Global Times on Thursday.

Since 2010, China Chengtong International Investment has invested in a large business park in Russia that serves as a platform for Chinese traders looking for opportunities in the Russian market.

Zhou downplayed the possibility of a shift toward the use of risk hedging tools by Chinese businesses operating in Russia, saying that it would be impractical.

He also dismissed the more extreme concerns about the ruble, with the currency already seeing a modest recovery. The yuan's central parity rate versus the ruble was set by China's central bank at 9.9979 on Thursday, compared to 11.3433 on Wednesday.

In a measure to stabilize market sentiment, Russian President Vladimir Putin told a news conference in Moscow on Thursday afternoon that Russia has sufficient foreign exchange reserves to weather the crisis.

As for the yuan's recent weakness, SAFE's Wang said that the market should not read too much into the weakening of the yuan "at certain moments, in certain months," as markets decide the yuan's value.

He also said signs of capital outflows that have been seen in certain months are normal, adding that the country still sees net capital inflows overall.

In response to a question by the Global Times about expectations of a further widening of the yuan's daily trading band against the US dollar, Wang remarked that both the central bank and SAFE will proceed with market-based reforms of the yuan's exchange rate formation mechanism.

He did not confirm or deny recent media reports about a widening of the current daily trading band from 2 percent to 3 percent in 2015.

The central government has appeared to be consistent in its approach to reforming the yuan foreign exchange rate regime, noted Liu at China Merchants Bank, adding that China's currency will not suffer from large fluctuations in the coming year.

The country has already made headway in liberating its capital accounts, Guo Song, director of the Capital Account Management Department at SAFE, told the news conference. Of the 40 sub-items of the country's capital accounts, 34 of them have become basically convertible.

Greater efforts have also been made to crack down on illegal private banks. Zhang Shenghui, director of the Supervision and Inspection Department at SAFE, revealed at the Thursday conference that as of October, 27 cases involving illegal banking operations had been uncovered this year, involving 65 billion yuan ($10.61 billion) and more than 90 suspects.