Frank Kane: Yuan set for major action in the UAE

The Internationalisation of the Chinese currency is attracting interest in financial centres across the world and looks to be a major event in the UAE later this year.

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The internationalisation of the Chinese currency, the yuan (sometimes called renminbi), continues apace with the country’s apparently inexorable progress to become the world’s biggest economy.

It is a process that has been attracting interest in financial centres across the world and looks set to be a major event in the UAE later this year.

The Brexit vote only increased the stakes, with some experts in London suggesting that the City could compensate for any waning influence in the European financial system by becoming the leading global centre for yuan trading, challenging Hong Kong, the current yuan offshore hub. The global competition to trade yuan is hotting up.

It should be noted that the potential is huge because the Chinese currency has some way to go before it can claim to match the power of its economy. The yuan is only sixth in the league tables for global payments behind the dollar, the euro, the British pound, Japanese yen and – even – Canadian dollar.

Those who might use the currency – basically anybody who trades with China – have been deterred by recent depreciation and a suspicion the Chinese authorities are manipulating the yuan for their own purposes, rather than allowing it to become a real free-market currency.

Whatever the accuracy of those claims, it seems obvious the UAE will want to become more involved in yuan currency trading. Closer China-UAE trade links have been identified as strategic priorities by UAE policymakers and an alliance on currency trading is an obvious aspect of that shift.

Regional rivalries also play a part. No doubt UAE enthusiasm for closer yuan ties were sharpened by the launch last year in Qatar of the first regional clearing centre, with Industrial and Commercial Bank of China (ICBC) as the clearer.

Recent reports that the People’s Bank of China, the central bank, would soon choose a Chinese bank in the UAE to be its clearer led to the assumption that Dubai would be the focus for the new arrangement.

There would be much logic to that. Dubai International Financial Centre is already the local offshore home to the four biggest Chinese banks and the value of their balance sheets accounts for roughly one quarter of the DIFC’s total assets. DIFC has been assiduously cultivating the Chinese financial authorities for several years.

But it is not necessarily a foregone conclusion that China will choose Dubai as its UAE hub. The Central Bank of the UAE, based in Abu Dhabi, has recently awarded licences to Bank of China and ICBC in support of expanding UAE-China trade and the One Belt, One Road strategy of China towards central Asia, the Middle East and Africa.

Those licences are onshore rather than offshore, which is where you would expect the Chinese yuan clearer to be located. But there is a now a viable offshore option in the capital, with the Abu Dhabi Global Market (ADGM) well and truly open for business.

ADGM officials are currently visiting China and the matter of a yuan trading hub is bound to be near top of the agenda in their talks with Chinese counterparts.

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