By 2020, the Renminbi will be among the world’s top five currencies, how is Dubai gearing up for this major economic shift?
As links between the major emerging markets proliferate, all eyes are on Dubai’s growing relationship with China.
Since 2002, China’s trade with the UAE has increased by five times, from $3.12 billion to $15.6 billion in 2012.
The Dubai International Financial Centre (DIFC) is home to four of the major Chinese banks; these Asian giants are aiming to leverage the lucrative south-south route and capitalise on a GCC-wide infrastructure boom.
In addition, the GCC’s rapidly growing population now represents an increasingly important market for China’s manufactured goods.
Aware of a growing need to support south-south capital flows, UAE banks have been keen to prepare for the imminent rise of China’s domestic currency by instating specialist Renminbi (RMB) services.
The use of RMB as a currency benefits both China and its trade partners by offering lowered transaction costs, pricing transparency and lowered price volatility.
“Standard Chartered was the first bank in UAE to open RMB accounts for clients in the UAE. We have successfully remitted and received RMB in UAE since 2009 and have been assisting banks in this region with their RMB solutions,” said Mohsin Nathani, CEO Standard Chartered Bank UAE.
“We have innovated ahead of the curve for RMB and continue to be the only bank able and capable of providing an Islamic RMB nostro accounts, with several financial institutions on board. Standard Chartered bank continues to champion and support the internationalisation and rise of RMB as a global currency.”
In a landmark moment in September, the Agricultural Bank of China listed a one billion Renminbi bond on Nasdaq Dubai, the first Middle Eastern listing of a bond by a Chinese issuer.
“If the Chinese are doing big business in the UAE then they will need the facilities to exchange and invest their currency in the region,” said Peter Cooper, editor of the Dubai-based Arabian Money newsletter.
“The DIFC is a natural home for the large Chinese banks to do business with its international regulatory system in the English language as in Hong Kong and Singapore. Where else would they choose as a base for trading the Renminbi as a currency in the region? In addition, Dubai is a major global transportation hub so it is easy to conduct regional business from this location, often as far away as South and East Africa.”
According to HSBC’s recent report ‘Rise of the Redback’, China has an established three-pronged approach to RMB internationalisation: expanding the currency’s role in cross-border trade settlement, developing offshore RMB centres and encouraging a wider use of RMB in cross-border investment.
“Huge strides have been made in all three areas. Expanding the RMB’s role in settling cross-border trade has happened much faster than anyone initially expected – in December 2013 the RMB overtook the Euro (EUR) to become the second-most used currency in global trade finance after the US dollar (USD). More and more outward and inward capital inflows are denominated in RMB,” the report said, adding, “the offshore RMB (CNH) bond market – dim sum bonds – has doubled in size each year since 2008.”
As a consequence, some foreign central banks are already starting to hold RMB in their reserves through channels such as the China Interbank Bond Market (CIBM) scheme and the Qualified Foreign Institutional Investor (QFII) programme.
Sovereign investors represent around 23 per cent of the QFII quota, or around $12 billion, although there is no separate disclosure on the amount of investment. This suggests some investors already see the RMB as a viable reserve currency, although they currently hold only small amounts.
HSBC added that China’s trade relationships with the emerging world would soon potentially exceed those with the developed world, “if south-south trade picks up, so should capital flows, which would further enhance the RMB’s potential as a reserve currency.”
From just three per cent in 2010, the RMB is now used to settle around 18 per cent of China’s total trade. However, this is still low compared with around 50-60 per cent for the euro area’s external trade settled in Euro, and 30-40 per cent in yen for Japanese trade.
HSBC said: “As both RMB internationalisation and financial reforms continue to accelerate, we think the expansion of the RMB’s role in global reserve management is also likely to be faster than many expect in the coming years. The currency will soon be ready to take its place at the top table, with full convertibility the benchmark.
“That said, that doesn’t mean the redback will replace the dollar as the dominant reserve currency. Instead it will help create a multiple reserve currency system in which the USD, the EUR and the RMB all play their part.”