China's yuan gains ground

One-hundred Yuan notes are seen in this picture illustration.

One-hundred Yuan notes are seen in this picture illustration.

Published Feb 29, 2012

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Bedroom sets, wooden dining tables and made-to-order sofas from China fill the showrooms of Royal Furniture in a dusty commercial district of Ajman, one of the United Arab Emirates.

The sight is common enough in the Arab Gulf, where booming economies are buying growing volumes of Chinese goods. But in one respect, Royal Furniture is a trend-setter: it pays for a small but significant portion of its products in China's yuan rather than the US dollar, the traditional currency for the region's trade.

For an area that has relied heavily on the dollar for decades - oil, the Gulf's main export, is priced in dollars, and most of its national currencies are pegged to the dollar - the shift is historic, pointing to a slow erosion of the US currency's dominance.

“The negotiations with suppliers are much easier, clearer and more transparent” when conducted in yuan, said Chandrasekaran Krishnamoorthy, director of Royal Furniture.

“They quote me 1,000 renminbi ($160) and they get 1,000 renminbi. They are protected from exchange-rate risk. I am exposed to exchange-rate risk, but if I ask them, they are going to build it in their prices.”

Commercial practices in the UAE have an impact on the entire Gulf because the UAE is the main trading hub and financial centre for the region. The UAE is China's top export market in the Arab world; China is the second biggest exporter to the UAE, after India.

Trade between China and the UAE expanded 39 percent from a year earlier to $32 billion in the first 11 months of 2011, with Chinese exports growing 28 percent to $24.3 billion and Chinese imports jumping 89 percent to $7.6 billion, China's customs data show. Most Chinese goods shipped to the UAE were re-exported to other countries in the Gulf, Africa and even Europe.

The use of the yuan to settle some of this trade marks a success in China's drive to promote the international use of its currency. In 2009, China launched a pilot programme allowing firms in some of its provinces to settle imports and exports in yuan; the scheme has since been expanded nationwide.

Before the programme, companies such as Royal Furniture would have wired payment to China in dollars, requiring the Chinese supplier to convert it into yuan. Now, they can pay directly in yuan from their accounts at banks which participate in the scheme in Hong Kong or, more recently, London.

“One of the advantages of settling in renminbi is that they can access a broader customer base in China,” said Janet Ming, who was appointed head of Royal Bank of Scotland's new China desk in London this month.

The transaction time for settlements is shortened substantially and costs for importers of Chinese goods are reduced because suppliers in China no longer add the risk of exchange rate fluctuations as a margin to the price, she said.

LARGER COMPANIES

So far, the use of the yuan is limited mostly to larger companies in the UAE, mainly retailers and importers of commodities, bankers say. For smaller firms, the effort involved in setting up yuan accounts may be too great; and since the yuan is for now not widely convertible in international markets, it remains easier to do many deals in dollars.

Royal Furniture, which has 12 outlets in the UAE and also re-exports products to the Middle East, North Africa and central Asia, says it uses the yuan with about 10 percent of the top Chinese manufacturers that supply it.

Tim Evans, regional head of trade and receivables finance at HSBC Middle East, said that while yuan transactions in the region were increasing alongside growth in China's trade with the Middle East and North Africa, they remained small overall.

“Right now, it is still a question of people becoming familiar with it as opposed to seeing very significant volumes of renminbi being traded at the moment,” he said.

International trade in oil is conducted overwhelmingly in dollars, so there appears to be little prospect of invoicing the Gulf's energy exports to China in yuan any time soon.

But the trend towards greater use of the yuan, in the Gulf and globally, is clear. Globally, the percentage of China's trade settled in yuan grew to roughly 7 percent in 2011 from under 1 percent in the June quarter of 2010.

HSBC predicts around $2 trillion, or more than half of China's global trade, will be settled in yuan by 2015.

“The interest for renminbi accounts is increasing because the renminbi is appreciating, and because of the financial crisis, the Gulf region is now looking East,” said Tian Jun, Bank of China's chief representative in Dubai and Bahrain.

The bank, China's top bank for foreign trade, currently has eight staff in its Dubai representative office. It aims to launch a subsidiary in the Dubai International Financial Centre (DIFC), the emirate's financial hub, by the end of 2012.

OFFICIAL SUPPORT

Growth of yuan-denominated trade in the UAE will depend partly on the support of local authorities. Here the signs are that the government is starting to embrace closer financial ties with China.

In January, the central banks of China and the United Arab Emirates signed an agreement allowing them to swap $5.5 billion worth of currency. The deal will ease payments for bilateral trade and investment by creating a mechanism to reduce exchange rate risk between the yuan and the UAE dirham, they said.

Last week Emirates NBD, Dubai's largest bank by market value and majority government-owned, said it would meet with investors before a possible issue of a yuan-denominated bond, which would be the Gulf's first.

And financial industry sources told Reuters that the DIFC expects to permit transactions in Chinese yuan from this year, expanding a payments system which focuses on settlements in US dollars and euros to include the Chinese currency. The plan still needs approval from UAE regulators.

“It is a bank-based system, so banks in the region could use it if they comply with the regulations. There will be huge demand,” said Nasser Saidi, the DIFC's chief economist.

In the long term, Dubai could become a major offshore centre for trading the yuan, some bankers believe, although Bank of China's Tian said local authorities would need to act more aggressively to facilitate this.

“When we were originally looking at this, there was a lot of talk of having a China desk in Dubai, mainly because the trade flow between China and the Middle East is one of the biggest in the world,” Ming at RBS said of her bank's decision to open a China desk in London.

“London is definitely the place we are going to start, and in theory what we would love to see is to have a China desk in London, the United States and the Middle East.”

Settling trade in yuan is an issue that many more companies in the Middle East will face, she said. “If you are seriously thinking of doing business in China, you definitely need to think about this.” - Reuters

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