UAE renews renminbi swap deal with China

China is Dubai’s largest trade partner and traders may get yuan from Central Bank.

Li Yuanchao, vice president of China (fourth right), met with UAE officials at the Great Hall of the People during a state visit to China. Ryan Carter / Crown Prince Court - Abu Dhabi ---

China has renewed its renminbi swap agreement with the UAE, in its latest move to internationalise the yuan.

The agreement allows the UAE Central Bank to provide up to 35 billion yuan, also called the renminbi, to settle bilateral trades.

“The swap agreement provides an institutional underpinning for using renminbi in trade,” said Mark Williams, the senior China economist at London’s Capital Economics. “If domestic sources of currency dried up, traders could get currency from the UAE Central Bank.”

China is Dubai’s largest trade partner and the UAE’s second-biggest trading partner, behind India. Trade with the country is set to reach US$60bn by the end of the year, the UAE Government says.

China has imposed strict capital controls and limits on the convertibility of the yuan to foreign currencies, to ensure that it can set domestic interest rates and maintain a fixed exchange rate.

Central banks that want control over a country’s interest rates and exchange rate are forced to restrict capital flows.

But China has successfully sought to become a global reserve currency – one of the basket of currencies that the IMF uses to fund bailouts and interventions.

This means that China has sought to make it easier to trade the yuan abroad – while allowing its exchange rate to vary against other countries.

Becoming a reserve currency is partly a matter of prestige for China, Mr Williams said. “There’s a sense that China as a great nation must have a currency that’s used globally.”

But the drying up of trade finance since the 2008 financial crisis led Chinese policymakers to worry that China’s dependence on dollar-denominated funding was a weakness that hurt traders, Mr Williams said.

Renewing the Central Bank’s swap facility won’t have much of a practical effect on companies, since “there’s a good chance that it will never be used, and will just remain an agreement on paper”, Mr Williams said.

But it’s a necessary first step if Dubai or Abu Dhabi aims to become a regional offshore trading hub for yuan-denominated investment. “For financial centres there’s a potential gain if the renminbi is widely used in investment and financial flows,” Mr Williams said.

“Those cities that become hubs of that trade will do well out of it. In the Middle East it’s not clear where that regional hub will be,” he said.

This month, the Dubai Gold and Commodities Exchange will open a trade in yuan currency futures, priced in US dollars. The move comes after the opening of a regional clearing centre for yuan trades in Doha in April.

On Monday, the yuan fell to a four-year low of 6.4665 per dollar after China introduced a new index valuing it against a range of exchange rates on Friday. It signals further depreciation against the greenback, according to yuan watchers including Goldman Sachs Group, DBS Bank and Daiwa Capital Markets.

A weaker currency will help exports, which declined in all but two of the first 11 months of this year.

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