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EXCLUSIVE: CHINA FIRMS GO 'UNDERGROUND' ON RUSSIA PAYMENTS AS BANKS PULL BACK

By Reuters
April 29, 20248:49 AM GMT+2Updated 3 days ago
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Pedestrians walk on an overpass near skyscrapers at the Central Business
District in Beijing, August 21, 2023. REUTERS/Florence Lo Purchase Licensing
RightsNew Tab, opens new tab
 * Companies

 * Company
   Agricultural Bank of China Ltd
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   Bank of China Ltd
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   China Construction Bank Corp
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April 29 (Reuters) - An appliance maker in southern China is finding it hard to
ship its products to Russia, not because of any problems with the gadgets but
because China's big banks are throttling payments for such transactions out of
concern over U.S. sanctions.
To settle payments for its electrical goods, the Guangdong-based company is
considering using currency brokers active along China's border with Russia, said
the company's founder, Wang, who asked to be identified only by his family name.
Advertisement · Scroll to continue

The U.S. has imposed an array of sanctions on Russia and Russian entities since
the country invaded Ukraine in 2022.
Now the threat of extending these to banks in China - a country Washington
blames for "powering" Moscow's war effort - is chilling the finance that
lubricates even non-military trade from China to Russia.
This is posing a growing problem for small Chinese exporters, said seven trading
and banking sources familiar with the situation.
Advertisement · Scroll to continue

As China's big banks pull back from financing Russia-related transactions, some
Chinese companies are turning to small banks on the border and underground
financing channels such as money brokers - even banned cryptocurrency - the
sources told Reuters.
Others have retreated entirely from the Russian market, the sources said.
"You simply cannot do business properly using the official channels," Wang said,
as big banks now take months rather than days to clear payments from Russia,
forcing him to tap unorthodox payment channels or shrink his business.


Reuters Graphics


GOING 'UNDERGROUND'

A manager at a large state-owned bank he previously used told Wang the lender
was worried about possible U.S. sanctions in dealing with Russian transactions,
Wang said.
A banker at one of China's Big Four state banks said it had tightened scrutiny
of Russia-related businesses to avert sanctions risk. "The main reason is to
avoid unnecessary troubles," said the banker, who asked not to be named.
Since last month, Chinese banks have intensified their scrutiny of
Russia-related transactions or halted business altogether to avoid being
targeted by U.S. sanctions, the sources said.
Advertisement · Scroll to continue

"Transactions between China and Russia will increasingly go through underground
channels," said the head of a trade body in a southeastern province that
represents Chinese businesses with Russian interests. "But these methods carry
significant risks."
Making payments in crypto, banned in China since 2021, might be the only option,
said a Moscow-based Russian banker, as "it's impossible to pass through KYC
(know-your-customer) at Chinese banks, big or small".

The sources spoke on condition of anonymity, citing the sensitivity of the
topic. Reuters could not determine the extent of transactions that had shifted
from major banks to more obscure routes.
China's foreign ministry is not aware of the practices described by the
businesspeople to arrange payments or troubles in settling payments through
major Chinese banks, a spokesperson said, referring questions to "the relevant
authorities".
The People's Bank of China and the National Financial Regulatory Administration,
the country's banking sector regulator, did not respond to Reuters requests for
comment.


SANCTIONS WARNING

U.S. Secretary of State Antony Blinken, after meeting China's top diplomat Wang
Yi for five and a half hours in Beijing on Friday, said he had expressed
"serious concern" that Beijing was "powering Russia's brutal war of aggression
against Ukraine".
Still, his visit, which included meeting President Xi Jinping, was the latest in
a series of steps that have tempered the public acrimony that drove relations
between the world's biggest economies to historic lows last year.
While officials have warned that the United States was ready to take action
against Chinese financial institutions facilitating trade in goods with dual
civilian and military applications and the U.S. preliminarily has discussed
sanctions on some Chinese banks, a U.S. official told Reuters last week
Washington does not yet have a plan to implement such measures.
The Chinese foreign ministry spokesperson said, "China does not accept any
illegal, unilateral sanctions. Normal trade cooperation between China and Russia
is not subject to disruption by any third party."
A State Department spokesperson, asked about Reuters findings that Chinese banks
were curbing payments from Russia and the impact on some Chinese companies,
said, "Fuelling Russia’s defence industrial base not only threatens Ukrainian
security, it threatens European security.
"Beijing cannot achieve better relations with Europe while supporting the
greatest threat to European security since the end of the Cold War," the
spokesperson said.
Blinken made clear to Chinese officials "that ensuring transatlantic security is
a core U.S. interest," the spokesperson said. "If China does not address this
problem, the United States will.”
Nearly all major Chinese banks have suspended settlements from Russia since the
beginning of March, said a manager at a listed electronics company in Guangdong.
Some of the biggest state-owned lenders have reported drops in Russia-related
business, reversing a surge in assets after Russia's invasion.
Among the Big Four, China Construction Bank (601939.SS)New Tab, opens new tab
posted a drop of 14% in its Russian subsidiary's assets last year and
Agricultural Bank of China (601288.SS)New Tab, opens new tab a 7% decline,
according to their latest filings.
By contrast, Industrial and Commercial Bank of China (601398.SS)New Tab, opens
new tab, the country's biggest lender, reported a 43% jump in assets of its
Russian unit. Bank of China (BOC) (601988.SS)New Tab, opens new tab, the
fourth-largest, did not give the breakdown.


'CHANNEL CAN BE SHUT'

The four banks did not respond to requests for comment on their Russian
businesses or the impact on Chinese companies.
Some rural banks in northeast China along the Russian border can still collect
payments, but this has led to a bottleneck, with some businesspeople saying they
have been lining up for months to open accounts.
A chemical and machinery company in Jiangsu province has been waiting for three
months to open an account at Jilin Hunchun Rural Commercial Bank in the
northeastern province of Jilin, said Liu, who works at the firm and also asked
to be identified by family name.
Calls to the bank seeking comment went unanswered.
BOC has blocked a payment from Liu's Russian clients since February, and a bank
loan officer said firms exporting heavy equipment face more stringent reviews in
receiving payments, Liu said.
The manager at the listed Guangdong company said their firm had opened accounts
at seven banks since last month but none agreed to accept payments from Russia.
"We gave up on the Russian market," the manager said. "We eventually didn't
receive more than 10 million yuan ($1.4 million) in payments from the Russian
side, and we just gave up. The process of collecting payments is extremely
annoying."
Wang is also having second thoughts about his Russian business.
"I may gradually shrink my business in Russia as the slow process of collecting
money is not good for the company's liquidity management," he said.
"What's more, you don't know what will happen in the future. The channel can be
shut completely one day."

Get a look at the day ahead in U.S. and global markets with the Morning Bid U.S.
newsletter. Sign up here.

Reporting by China bureau; Additional reporting by Simon Lewis and Vineet
Sachdev; Editing by Sumeet Chatterjee and William Mallard

Our Standards: The Thomson Reuters Trust Principles.New Tab, opens new tab

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