UAE lags rivals in adapting to the rise of the yuan

The current “next big thing”, by common consent among financial experts, is the growth of the Chinese yuan as a global currency. But the UAE seems almost unaware, at an official level at least, of the opportunities this transformation of the world financial scene will present.

At the very least, the UAE seems some way behind other financial hubs in the preparations for the arrival of the yuan.

The emergence of the yuan has been a hot topic in the geo-financial community for some time. Just recently, Douglas Flint, chairman of HSBC, told a gathering of bankers and officials in London that the “yuan is already a major global currency”, lining up alongside sterling, dollars, deutschemarks, yen and euros as currencies that have, for shorter or longer periods, been the world’s dominant mediums of exchange.

The US dollar still occupies that position, as it has for most of the past century, but there are fundamental and persuasive reasons this could change in the not-too-distant future. The Chinese economy will overtake the US in size in a matter of years, maybe even months.

When the yuan is made fully convertible, which Mr Flint said could happen by 2017 such is the speed of reform in China, it could make a quantum leap in the world currency league. It has already overtaken the euro as the world’s second trading currency.

That still does not make it a “reserve” currency like the dollar, but the clear and apparently inexorable trend is in that direction.

Some financial centres have recognised this tide, and are positioning themselves to swim with it. In the east, Hong Kong and Singapore have given official backing to the establishment of yuan trading centres within their jurisdictions. In Europe, London and Luxembourg have also joined the party; just yesterday, the French central bank announced a deal with Beijing to base yuan trading in Paris. Even Istanbul is talking enthusiastically about the yuan.

The gap in between east and west is one that the UAE increasingly sees as its own space in global financial markets. Indeed, one of the basic arguments for the establishment of the new Abu Dhabi Global Market is to bridge this gap. Yet with regard to the yuan, there seems little official enthusiasm to promote the UAE as the leading regional centre.

There is of course one big reason why the UAE has been quiet on the subject: the dirham is officially pegged to the US dollar, an arrangement that has served the country well for many years and through successive phases of the economic cycle.

But loyalty to a tried and trusted system is not an excuse for failing to spot a commercial opportunity, and indeed there is no reason why the dollar-dirham peg should not be maintained in parallel with a push for greater yuan capability.

One first step towards this would be to increase the number of qualified financial institutional investors (QFIIs) in the UAE. These are institutions recognised by the Chinese authorities as suitable partners with whom to do business.

The Abu Dhabi Investment Authority is the only QFII in the country, and there are only three in the Arabian Gulf region, compared to dozens in the US and Europe. Even tiny Belgium has five QFIIs.

The next challenge is to create a pool of yuan liquidity in the UAE that can handle the booming yuan trade. At the moment, probably less than 1 per cent of the country’s reserves are in the Chinese currency, compared to high double-digit percentages elsewhere.

Booming trade between the UAE and China will rectify some of this on its own. Chinese exporters are increasingly keen to denominate transactions in yuan, and as UAE-China trade moves away from the Dragon Mart consumer stereotype to higher value sectors, like telecom infrastructure products produced by the Chinese conglomerate Huawei for example, this makes supreme financial sense.

Some lone voices have been raised in Dubai and Abu Dhabi in support of the UAE as a centre for yuan trading, but they have failed to get much traction. Yuan trading is an idea whose time is coming, if not already come, and it would be in the UAE’s long term interest to pursue the opportunities it presents.

Follow us on Twitter @Ind_Insights