China banks: renminbis for Russia heighten secondary sanctions risk

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“Thank You For Being a Friend” was the schmaltzy theme song of eighties sitcom The Golden Girls. It merits an ironic reboot to accompany China’s billions in lending to Russian banks. Russia badly needs external financial counterparties. The west has cut most such ties in response to the invasion of Ukraine.

What suits Beijing in its mission to promote the renminbi as a world currency could end up hurting Chinese banks.

China’s exposure to Russia’s banking sector quadrupled in the 14 months to the end of March this year. The country’s largest banks, Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China increased lending to Russia to $9.7bn from $2.2bn.

China has not participated in the blizzard of sanctions imposed on Russia by western and Asian democracies. Smaller Chinese banks have strengthened ties with Russian clients.

Big Chinese banks have typically distanced themselves from Russia. Some stopped lending entirely. When Russian companies first started using the renminbi to circumvent western sanctions, some Chinese lenders even restricted transfers from Russia. 

China’s growing Russian loan exposures smack of official policy imperatives. China resents the US dollar’s hegemony as the global reserve currency. It has for years been trying to boost the renminbi’s market in global trade with hopes it could become a reserve currency too.

Last year, the renminbi surpassed the US dollar as the most traded currency in Russia. Dollar settlement of Russian exports plunged and trade with China hit a record $185bn. This has bolstered China’s hopes Russia could adopt the renminbi as a reserve currency.

Chinese loan exposure to Russia remains small at less than $10bn. Any defaults would have negligible impact. ICBC alone has total assets of about $5.7tn, the largest in the world.

So far, the west has steered clear of secondary sanctions on unaligned nations. But these remain a tail risk for Chinese businesses dealing with Russia. They could yet become a reality if, for example, Russia resorts to battlefield nuclear weapons.

Chinese banks who went on lending could then find themselves cut off from all sources of US dollar liquidity. That would be hugely painful for a sector already disrupted by real estate chaos. The theme tune for the China-Russia lending love-in would then be “Thanks for the Memory”.