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In 2024, the ruble and yuan may undergo significant changes. A Bank of Russia report showed the yuan’s share of currency turnover on the Moscow Exchange at 46% in November 2023, while the share of the dollar and euro fell to 52%. Russian companies are issuing bonds in yuan, and banks are expanding the supply of yuan deposits. Therefore, it is important what the share of the Chinese currency is in trade between Russia and other countries of the world, as well as its resistance to inflation and possible areas of investment for Russian investors.
The future of the ruble and dollar in 2024
The future of the ruble and euro in 2024
The importance of the yuan in the Russian economy
The importance of the yuan in Russia is becoming increasingly noticeable. This is reflected in the revision of the asset structure of the National Welfare Fund by the Russian Ministry of Finance at the end of 2022. The fund can now only invest in renminbi-traded assets, while investing in dollar instruments is completely prohibited, with sterling and yen balances reduced to zero. Data as of December 1, 2023 shows that the National Wealth Fund is worth 13.4 trillion rubles, of which 3.5 trillion rubles, or about a quarter of the “national wealth,” is held in Chinese currency.
The yuan exchange rate forecast for 2024 depends on many factors.
The foreign exchange market and trading over the past two years have shown a significant increase in yuan trading volumes on the Moscow Exchange, which grew 100 times from 27 billion to 2.7 trillion rubles. The yuan began to be used more often in foreign trade. If until 2022 the Chinese currency was practically not used, then by November 2023 it accounted for an impressive 33% of exports and 37% of imports to Russia. In the 11 months of 2023, trade between Russia and China increased by more than a quarter compared to the previous year. Also in September, Russia took fifth place in the world ranking for the use of the yuan in international payments, with a share of 1.95%.
Ruble against Yuan
Unicredit’s currency strategists have updated their forecasts for the exchange rate of the US dollar (USD) against both the Chinese yuan (CNY) and the Russian ruble (RUB) in the coming years. The forecast points to a possible scenario in which USD/CNY could fall below 7.00 in 2024. In addition, it is expected that this year dollar/ruble pair will fluctuate around 100, and by the end of 2024 it may rise to 115.
In the recent past, the Chinese Yuan (CNY) and Russian Ruble (RUB) have depreciated against the US dollar (USD). This trend, seen prominently in August 2023, experienced additional selling pressure early the following month. This was mainly due to the recovery of USD strength, which was reflected in the exchange rate hitting 16-year highs.
It is noteworthy that the rates USD/CNY and USD/CNH exceeded 7.34 and 7.36, respectively, and at the same time the dollar/ruble rate tended to around 98. According to Unicredit, further significant depreciation of the Chinese yuan or Russian ruble is not expected this year. However, a significant recovery is not expected in the near future.
“The deteriorating economic situation in China, coupled with signs of weak inflation, does not provide serious reasons for seeking currency appreciation at the moment,” says Roberto Mialic, currency strategist at Unicredit. In addition, Russia’s shrinking current account surplus coupled with a growing budget deficit appears to be pushing for a more depreciated ruble. However, the analyst notes that the Central Bank of Russia (CBR) faces the task of coping with the inflationary consequences of a potential weakening of the currency.
The position of the Chinese authorities regarding the relationship of their currency to the US dollar (USD) has changed.
Previously, the 7.35 mark for the USD/CNY pair was perceived as a “line in the sand”, indicating a psychological barrier that the authorities did not want to cross. What will happen to the yuan in 2024? Current sentiment suggests that Chinese authorities have become more lenient with rates even above this threshold. “The Chinese authorities now seem to be comfortable with the US dollar-yuan exchange rate exceeding 7.35,” Mialich says. Such shifts in the outlook make US$/RMB falling below 7.00 an increasingly compelling storyline for 2024, but this is contingent on positive Chinese economic trajectories. The strategist emphasizes the conditionality of this scenario, suggesting that the actual outcome will largely depend on economic improvements in China.
As for the dynamics of the Russian ruble against the US dollar, forecasts indicate that trading will be close to the 100 range by the end of this year. However, looking ahead, the horizon paints a different picture. “We expect the dollar-ruble exchange rate to trade around 100 this year and rise to 115 by the end of 2024,” the analyst adds.
Yuan will grow moderately
The recent strengthening of the Chinese yuan against the US dollar reflects strong market confidence in China’s economic recovery potential and improving external conditions. Experts said the Chinese currency’s upward momentum is likely to continue over the next few months. After rising 800 basis points to hit 7.16 per US dollar on Monday, its best in four months, the domestic yuan continued to gain strength and neared 7.13 in early trading on Tuesday.
Offshore yuan (yuan traded outside the Chinese mainland market) also jumped more than 500 basis points on Monday, breaking through the 7.17 level against the US dollar. At the beginning of the trading session on Tuesday, it reached 7.14.
Zhou Maohua, macroeconomic researcher at China Everbright Bank, said domestic economic data shows that the pace of recovery in China’s economic activity has strengthened significantly and the economy has reached its potential growth rate. These factors contributed to the recovery of the yuan’s position in the foreign exchange market, he said.
Fan Ruoying, a researcher at the Bank of China, said the country’s economic recovery has been noticeable since the third quarter as policies introduced earlier to stabilize the economy gradually began to bear fruit. Key macroeconomic indicators related to consumption, investment and corporate profitability showed marginal improvement. According to her, all these factors supported the performance of the yuan.
HSBC raised its forecast for China’s economic growth rate in 2023 to 5.2 percent from 4.9 percent, citing a rebound in consumption that is boosting overall domestic economic activity. HSBC also revised down its forecast for China’s GDP growth in 2024 to 4.9 percent, down from a previous estimate of 4.6 percent.
According to JP Morgan China chief economist Zhu Haibin, growth in investment in China’s new energy vehicles, manufacturing and infrastructure has been quite remarkable this year. As a result, JP Morgan revised its forecast for China’s GDP growth in 2023 to 5.2 percent, down from a previous estimate of 5 percent.
According to Fawad Razaqzada, market analyst at financial services provider City Index, the market is too bullish on the US dollar. The latest data shows the US consumer price index fell faster than expected, bolstering market expectations that the Federal Reserve will not raise interest rates again. Thus, the interest rate gap between China and the US will now gradually narrow.
Wang Tao, chief China economist at investment bank UBS, said the U.S. dollar-yuan exchange rate has remained steady at around 7.3 this year, which can be partly explained by a recovery in domestic demand and improving exports. The US dollar could start to weaken as the Fed cuts interest rates and US economic growth slows in 2024. helping it rise moderately against the US dollar, Wang said. The US dollar to yuan exchange rate is expected to be around 7.15 in 2024 and reach 7 in 2025.
Although Wang estimated that the yuan will hover around 7.3 against the US dollar in early 2024, China’s central bank will not resort to devaluing the yuan to boost exports or economic growth. On the contrary, it will place greater emphasis on market confidence in the RMB exchange rate and its stability. According to the Central Financial Work Conference held at the end of October, more efforts need to be made to strengthen foreign exchange market management and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
Changing role of the yuan in the world
In September 2023, the Chinese currency took second place in international trade settlements via SWIFT, increasing its share to 5.8%, while the euro , in third place, had a share of 5.4%. This explains why the yuan is rising. However, the dollar remains the absolute leader in trade transactions, covering more than 80% of international payments.
Although the dollar still occupies a dominant position, the sanctions policies of Western countries may change this situation. In August, the South African president expressed dissatisfaction with Western countries increasingly using global financial and payment systems as a “tool of geopolitical struggle.” The Central Bank of India takes the same position, which considers it important to find an alternative to the dollar and euro due to the high risk of sanctions. The current alternative to the yuan is only currency of the BRICS countries, which, however, exists only on paper.
The yuan’s share of global foreign exchange reserves and trade settlements is growing rapidly, but still lags significantly behind the dollar. By the end of the first half of 2023, the yuan’s share of global foreign exchange reserves had nearly doubled in 6 years to reach 2.45%. The dollar’s share fell 6.48% during this time, but still holds an impressive 58.88%.
The BRICS group of countries can expand the use of their currencies in international trade and increase their foreign exchange reserves by expanding their financial infrastructure. The People’s Bank of China is actively interacting with central banks of other countries, opening bilateral swap lines and expanding the network of correspondent banks. In addition, China is developing a cross-border payment system, CIPS, similar to SWIFT, which was launched in 2015.
A very important event for the yuan was the agreement between China and Saudi Arabia to create a bilateral exchange line between their central banks. China is the recipient of 25% of Saudi Arabia’s oil exports, and a switch to the yuan in oil payments could strengthen the Chinese currency’s position in global trade.
Conclusion
Various forecasts indicate the possibility that USD/CNY could fall below the 7.00 mark in 2024. Taking into account the expected decline in the dollar/ruble pair this year to 100, we can assume an equilibrium CNY/RUB rate of around 14.3.
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