Transactions using the Chinese Yuan Renminbi (RMB) have become prevalent in foreign currency markets in the Middle East. It is a major currency option for governments and companies to use for overseas economic transactions, particularly with China. This comes in light of the internationalization of the Chinese currency which, in October 2016, joined the major currencies of the International Monetary Fund, and enjoyed a recent unprecedented surge in bilateral economic relations between China and most regional countries.
As a means to boost utilization of the Yuan in regional markets, last month China agreed to establish clearinghouses for the Yuan with several regional countries. Other countries also quickly signed agreements to swap the Yuan for local currencies, and some central banks in the region added the Yuan as a foreign reserve currency. Both sides will gain great advantages from these moves, most notably boosting confidence in economic transactions between the two sides, which will undoubtedly reflect on the flow of trade, investments and tourism among them. These incentives and benefits could entice more countries and regional bodies to demand the Chinese currency, thus expand trade of the Yuan in the future.
Many incentives:
Regional and international incentives encouraged the expansion of using the Yuan in settling bilateral transactions, most notably:
1- International currency: In October 2016, the IMF added the Yuan to its basket of major currencies alongside the US dollar, the euro, Japanese yen and sterling pound. This reflects China’s growing involvement in the global trading system and a surge in the trading and circulation of the Yuan on the global stage. Today, the Yuan is second to the euro as the most used currency in settling global commercial payments, with a share of 4.6% in October and 1.6% rate of settling international payments in the same month. This is a major development in transactions around the globe.
2- Growth of intra-regional trade: Trade ties between China and the Middle East have grown quickly over the past few years. In 2010, China replaced the US as the largest trade partner with the regions countries, with trade reaching $246.6 billion in 2015 compared to $18 billion in 2000, according to IMF figures. Trade is expected to grow thanks to growing Chinese demand for oil from OPEC countries in the region, while the Chinese market has become one of the major sources of regional imports of hi-tech goods and other traditional manufactured and semi-manufactured goods.
3- Investment partnerships: As well as growing trade, the more influential development in economic relations in recent months has been China’s release of what is known as “China’s Arab Policy Paper” in January 2016. The document revealed that Beijing is adopting new avenues to boost cooperation between China and the Arab world in the fields of science, infrastructure and others.
During a tour by Chinese President Xi Jinping of several countries in the region, including Egypt, Saudi Arabia and Iran, he promised to provide $55 billion in the form of loans and investments for infrastructure projects in the region. Currently, China is involved in several projects in the Middle East, including for example the New Administrative Capital in Egypt.
The share of Asian investors buying Middle East bonds has also grown, led by the Chinese, to 30% in the first nine months of 2016; almost double its previous levels. All of the above further cement the region’s investment and financial ties to China.
4- Addressing currency conditions: In view of the above considerations, relying on other international currencies such as the Yuan in foreign transactions could be a good opportunity for the region to offset the strong rise of the dollar against local currencies – especially after Donald Trump won the US presidential race in November 2016. It will also undoubtedly contribute to curbing successive crises pertaining to the lack of dollar liquidity in the region. It also provides a gradual transition to other currencies, such as the Yuan, to boost the flow and more efficiently manage the risk associated with foreign currency markets.
Patterns of monetary cooperation:
Using the Yuan in Middle East markets has become more common with the growing number of clearinghouses and the addition of the Yuan to foreign reserves of some central banks in the region, as follows:
1- Clearing centers: Due to recent progress in Sino-Gulf relations, countries such as Qatar and the UAE took the initiative to establish settlement and clearing centers for the Yuan. In 2015, Qatar established a clearinghouse for the Yuan similar to others around the world found in Singapore, Britain, Germany and Australia. Meanwhile, the Central Bank of China (CBC) recently assigned the Dubai branch of the Chinese Agricultural Bank as the clearing bank for the Yuan in the UAE.
To boost the role of these clearinghouses in stabilizing the exchange rate of the Yuan against local currencies, China deregulated the direct exchange rate regime for the Yuan, UAE dirham, Qatari riyal and Saudi riyal in September 2016. This means these three countries can make trade deals with China using their local currencies directly, instead of the dollar or another international currency. This avoids the risks and losses resulting from indirect exchange rates.
2- Local currency swaps: Some countries in the region recently signed bilateral agreements with China to swap local currencies. CBC announced in early December 2016, that an agreement was signed with the Central Bank of Egypt worth 18 billion Yuan ($2.62 billion) for a three-year currency swap.
Turkey also recently signed a deal for a currency swap worth 450 million Turkish lira ($132 million). It is part of a deal signed in 2015 for a currency swap worth 12 billion Yuan ($1.88 billion) between the two countries. CBC announced the deregulation of direct exchange between the Yuan and lira, when previously the dollar was used to decide the exchange rate of the Yuan against the lira.
In May 2016, CBC signed a local currency swap with its Moroccan counterpart worth 10 billion Yuan ($1.54 billion) for a renewable three years if both sides agree. At the same time, Iran began preliminary talks for a local currency swap with China in January 2016.
3- Currency reserves: In early December 2016, the Central Bank of Tunisia decided to add the Yuan to its foreign currency reserves, in a move to diversify its hard currency reserves. This may cause other central banks in the region to follow suit. In fact, some banks in the Middle East have already started opening accounts in Yuan to enable clients to carry out transactions in the Chinese currency.
Map of the future:
In reality, trading in the Yuan in the region comes as part of limited bilateral agreements in most cases and is controlled by current volatile and complicated political and economic conditions in the region that may not go away in the future, which has temporarily increased demand on the Yuan.
Nonetheless, the chances of trading in the Yuan on foreign currency markets in the region are gradually increasing after the internationalization of the Chinese currency and deeper inter-relations between China and the Middle East. A survey by the British bank HSBC between May and July 2016 showed that the future of the Chinese Yuan in the region is very promising. It is expected to become a main choice for companies in the region to open letters of credit and trade transactions. This could lead to the Yuan cornering 25% of flow management of foreign currency across the Middle East, according to the bank’s forecast. This would naturally mean that the Yuan is a trusted currency and would give it more weight in the region. Nonetheless, it will not overtake other hard currencies that are more prevalent and reliable worldwide and in the region, such as the dollar and euro.
Irrespective of the Yuan’s share, it is certain that as the region relies more on the Yuan in the future it will boost gains for both sides. It will open greater prospects and potential for trade between China and regional countries as well as other countries that now accept trading in the Yuan. It will also improve the flow of Chinese capital to Middle East markets.
Other important influences for trading in of the Yuan is bolstering Chinese tourism to the region, especially as the Chinese have become more interested in visiting tourist destinations. This coincides with moves by some countries to attract Chinese tourists. For example, Morocco announced Chinese visitors will be exempt from entry visas starting June 2016.
In conclusion, the Yuan has become a reliable currency in the region and worldwide, which is a key turning point for economic partnerships between China and the Middle East in the coming years.
