Yuan’s rise is a fairer exchange

China began to allow international trade in its currency in 2009. Today, confidence in the proliferating yuan-denominated accounts is growing fast as trade partners, such as the UAE, benefit from settling debt in the local currency.

The confidence in using yuan-denominated banking accounts in the UAE has accelerated as trade flows with the world's biggest exporter grow. Above, South Sea Creation shop at Dragon Mart in Dubai. JaimShow more

Banks in the UAE expect demand for yuan accounts to grow by as much as 40 per cent, driven by small businesses trading with the world’s second largest economy.

Burgeoning trade with China means that the UAE already uses the yuan for more a quarter of its direct payments with China and Hong Kong.

And as trade between the pair grow, analysts expect more goods to be bought and sold using the Chinese currency.

The urrency, also known as renminbi, may corner just 1.59 per cent of global payments, according to Swift financial messaging firm, but its appeal is gaining momentum in the UAE as more companies choose to deal in a currency that until 2009 was not accessible for international trade settlements.

In 2009, China started to internationalise the yuan by giving Hong Kong the power to become the first location outside of China for clearing the currency.

The confidence in using yuan-denominated banking accounts has accelerated in the UAE as trade flows with the world’s biggest exporter grow. Trade between the UAE and China reached more than US$40 billion in 2013, compared with $35bn in 2012. China is the UAE’s second-largest trade partner after India.

All of these factors have encouraged local banks to start offering yuan accounts, including Dubai-based Emirates NBD and Mashreq, which compete with international players such as HSBC and Standard Chartered in offering this service.

“Given the increasing share of trade that is done with China, it is natural that traders will move to settling their transactions in the Chinese currency,” says Karim abadi, senior vice president of global transaction services at Mashreq. “As part of this plan, China has been building its financial infrastructure, payment systems and gradually loosening restrictions on the yuan so that Chinese companies can be paid directly in the currency.”

China’s measures to ease restrictions on the yuan have made waves in the UAE. The Emirates is one of 50 countries now using it for more than 10 per cent of their payments value with China and Hong Kong, according to Swift. Belgium-based Swift facilitates most of the global cross-border payments and issues a monthly tracker of yuan payments.

“The UAE uses [yuan] for more than 25 per cent of its direct payments with China and Hong Kong, not using an intermediary clearing centre,” says Astrid Thorsen, the head of Swift’s business intelligence solutions.

Out of China’s total trade in 2013, about 18 per cent was settled in yuan, compared with 3 per cent in 2010, according to HSBC Global Research. HSBC has forecast the figure will rise to 30 per cent this year.

China, the world’s second-largest economy after the United States, overtook the US in 2013 as the world’s largest trading nation with a total trade value of $4.16 trillion.

“The encouragement has been for corporates to open an account and have the choice to transact import and export invoices in [yuan] as opposed to US dollars,” says David Pavitt, the head of renminbi business development for Europe, the Middle East and Africa at HSBC. “So the initial incentives for corporates to do that, especially for imports from China, by potentially tapping for those goods in [yuan] is that they may potentially get a discount.”

Small and medium-sized enterprises (SMEs) in the UAE are driving the growth in yuan accounts.

For example, Mashreq's yuan accounts grew approximately 30 per cent year on year over the past two years thanks mainly to SMEs. The lender is hoping for 40 per cent year-on-year growth in the coming three years.

“The SME sector has been seen to be a big driver for growth of yuan accounts in UAE, due to the potential of China as a trading partner for UAE and the Middle East region,” says Mr Labadi. “Building materials, textiles, equipments made in China have a huge demand in the Middle East region due to their cost advantage.

“Corporations in China who are looking to export goods from China into the Middle East region also open yuan accounts to save costs and ensure timely remittances to [and] from China.”

Standard Chartered is also experiencing growth in yuan accounts. Last year, yuan trade throughput was up by 18 per cent compared to 2013 in the UAE. Growth in yuan balances was more than 100 per cent in 2013 when compared to 2012.

“We have started to see more interest in yuan-denominated accounts from the corporate side and also even more from the financial institutions to use us to facilitate their yuan services to their customers,” says Haytham El Maayergi, Standard Chartered’s head of transaction banking in the UAE.

“We started to see Dubai more as a gateway to Africa and people who want to bank in Africa and the Middle East, they typically choose Dubai or DIFC [Dubai International Financial Centre] as a regional treasury centre to manage this area.”

Several Chinese companies, either subsidiaries of Chinese companies or traders who want to import from China and the export to the rest of the region, are interested in this service, he adds.

China is currently Africa’s biggest trading partner and often uses Dubai’s ports for re-exports to the continent.

There are more than 4,200 Chinese companies operating in the UAE, and there are 2,500 registered Chinese trademarks. An estimated 300,000 Chinese nationals reside in the country.

The Dh1 billion expansion of Dragon Mart, Dubai’s retail Chinatown, will more than double the mall’s size to 335,000 square metres and increase the number of Chinese businesses and residents in the emirate. Companies in the UAE and elsewhere around the world can also hedge in yuan, which will help them save transaction costs for trade and investment.

“The advent of the physical cash flow market in 2010 has meant that corporates can now hedge exact physical cash flow in [yuan]. To enable corporates to hedge exact physical cash flow in [yuan] they need to have an account,” says Mr Pavitt.

“If you are dealing in [yuan] and hedging in [yuan], it is much easier to maintain price stability and know what your future cash flows are.”

The US dollar remains by far the world’s payment currency of choice, accounting for 43.5 per cent of global payments in October, according to Swift. The yuan in October ranked as the seventh global currency, beating the Swiss franc and Hong Kong dollar, according to Swift. Only in October 2010, it was number 35.

“This is becoming really a significant market now. It is rivalling some of the G10 currencies in terms of volume and it is only going to get bigger,” says Mr Pavitt. HSBC expects full convertibility of renminbi by 2018.

But there is still a few pieces missing from the yuan jigsaw puzzle.

The GCC is still negotiating a free-trade agreement with China. Once the accord is signed, it will boost trade flows and settlements in yuan.

The UAE also needs to be a clearing centre for yuan to boost dealing in the currency. With a clearing bank, yuan transactions will be quicker and less costly. But Qatar is set to become the first such Middle Eastern centre.

Another hiccup in the road to internationalising the yuan in the UAE and Arabian Gulf is the fact that all Gulf currencies are pegged to the dollar, except Kuwait’s.

“What we export to China is basically oil and oil is dollar-denominated, so the inflows from China always come in dollars while the other side is trying to push into yuan,” says Mr El Maayergi.

“We don’t have enough receivables in yuan to make payments in yuan.”

Follow The National's Business section on Twitter