Ruble swap: China is challenging IMF as emergency lender, gaining more influence over global economy

This weekend Chinese officials anounced they are willing to expand a $24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. Some time earlier, China has already provided $2.3 billion in funds to Argentina as part of a currency swap, and last month it lent $4 billion to Venezuela, whose reserves cover just two years of debt payments. With these moves, China is bolstering its influence in the global economy.

China and Russia signed a three-year currency-swap line of 150 billion yuan ($24 billion) in October, a contract that allows Russia to borrow the yuan and lend the ruble. While the offer won’t 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.

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

By lending to nations shut out of overseas capital markets, Chinese President Xi Jinping is bolstering the country’s influence in the global economy and cutting into the International Monetary Fund’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, the chief investment officer at Kolding, Denmark-based Global Evolution A/S who helps manage about $2 billion of emerging-market debt, said by phone. “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 dollar in Moscow on Monday after Hong Kong-based Phoenix TV cited China’s Commerce Minister Gao Hucheng as saying that expanding the currency swap between the two nations would help Russia. The Russian currency has gained 10 percent over the past two days, paring a selloff that’s made it the world’s worst performing currency over the past six months.

More to that, the People’s Bank of China has signed currency-swap agreements with 28 other central banks around the world, including those in the U.K. and Australia, making the yuan an alternative to the dollar for global trade and finance. By promoting the use of its currency, China acts in its own interests as it challenges the dominance of the U.S. in the global economy.

Two months after Russia annexed Crimea in March, China signed a three-decade, $400 billion deal to buy Russian gas. Oil imports from Russia hit an all-time high in November, according to China’s General Administration of Customs. While the ruble’s depreciation affected Chinese exports to Russia and made it difficult for the two countries to implement joint projects, the challenges shouldn’t be exaggerated, according to a commentary published in the official People’s Daily newspaper today.

China has made $47 billion in loans to Venezuela since 2007, making it the country’s largest creditor, according to Eurasia Group, a political consulting firm. Venezuela, which holds the world’s largest oil reserves, repays the loans by shipping crude to China.

In July, Xi signed trade and investment agreements for at least $7.5 billion in Argentina, cementing China’s ties to the world’s third largest soybean producer.

“China is playing an increasingly more important role and is willing to engage,” Michael Ganske, who oversees $8 billion as the head of emerging markets at Rogge Global Partners Plc, said by e-mail from London. “There is geo-strategic importance connected with” the funding deals, he said.