Friday, July 5, 2013, 08:14
Yuan makes strides in Dubai
By Sudeshna Sarkar in Hong Kong

Yuan makes strides in Dubai
Emirati employees work at the Standard Chartered Bank’s trading room at the Dubai International Financial Centre. It was the first foreign bank to offer yuan accounts in the Middle East. (AFP)

In just a few years the currency has become a key player in the Middle East’s financial center

Though the event happened three years ago, Haytham El Maayergi doesn’t have to pause for a moment to recollect the date. It is imprinted on his mind, being a landmark transaction not only for Standard Chartered Bank, where he is head of transaction banking for the United Arab Emirates, but in the banking history of the entire Middle East as well.

“In October 2010, we opened a yuan account in Dubai for the retailer Rivoli,” he says. “This put Standard Chartered on the map as the first foreign bank in the Middle East to open a yuan account for a corporate in the region.”

The Rivoli Group, a luxury retail chain headquartered in Dubai with over 120 international brands including Gucci, Bvlgari and Omega, started the pathbreaking account to promote itself to Chinese buyers.

With access to end-to-end yuan trade settlement services, clients can expect a shorter settlement cycle for goods and services, increased control, and transparent pricing, says Farooq Siddiqi, head of Standard Chartered’s transaction banking in the Middle East and North Africa.

Three years down the line, the bank in the UAE has a diverse portfolio of about 100 yuan account holders. Charles Tan, the lender’s regional product manager, says they include Chinese State-owned enterprises, global firms and local companies.

While Chinese businesses are naturally inclined to trade in the domestic currency, their business partners are also following suit now, as yuan transactions cut down foreign exchange risks and enable them to get discounts where possible. They also simplify documentation.

“The direction is clear,” says El Maayergi. “With trade between the UAE and China growing larger, people are interested in more transactions in yuan. Look at the progress (of the yuan trade) in just a few years. It will grow more internationally as more people trade in it, especially in the UAE, which is a key trading partner of China.”

According to the UAE Ministry of Foreign Trade, China was the federation’s second largest trade partner in 2012. Bilateral transactions jumped to about $15.6 billion from $3.12 billion in 2002. The growth will be greater once China and the six-member Gulf Cooperation Council (GCC) conclude a free trade agreement, negotiations for which started in 2004.

“In 2012, Standard Chartered UAE saw a 750 percent leap in its yuan transactions over 2011, a significant growth for the business,” notes El Maayergi.

By 2020, the Economist Intelligence Unit assesses that China will be the most important economic partner of the GCC. Nearly 70 percent of all Sino-Arab trade takes place through Dubai.

Growing influence

Soon after Standard Chartered became the first foreign bank in the Middle East to offer yuan accounts, others began to follow suit, indicating the growing influence of the yuan. They include HSBC; local bank Mashreq; and Emirates NBD, Dubai’s largest bank.

Emirates banks have also begun taking their business to the yuan heartland. The Union National Bank was the first to open a representative office in Shanghai in 2007. Since then the National Bank of Abu Dhabi has established representative offices in Shanghai and Hong Kong, and Emirates NBD opened its Beijing office last year.

Chinese lenders have returned the compliment with three banks setting up shop at the Dubai International Financial Centre (DIFC), the state-administered federal financial free zone. These are the Industrial and Commercial Bank of China (ICBC), Bank of China and Agricultural Bank of China.

Of them, ICBC alone reportedly conducted yuan transactions valued at $2.1 billion in the inter-bank money market in the first half of 2012.

Yuan deals between China and the UAE have also been facilitated by the 35 billion yuan ($5.5 billion) currency swap agreement signed last year and the DIFC introducing a payment system to allow clearings and settlements in yuan.

Besides the growing China-UAE trade, the boom in yuan settlements in Dubai is also because of the emirate’s strategic position as a gateway to Africa.

“This is a center for regional trade,” El Maayergi says. “Customers from China can export to other countries, especially in Africa, though Dubai.”

“China is the biggest investor into Africa, and much of that activity is now out of Dubai — it’s very much the chosen platform for Chinese companies to invest into Africa,” DIFC chief economist Nasser Saidi said at a press conference in Dubai.

“(Though) yuan trading accounts for only about 4 percent of our overall trade, given the vast volume of bilateral trade, there is every reason for the scope to expand rapidly.”

While the UAE market is not yet deep enough to see the floating of ‘dim sum’ bonds, there are offshore issuances in Hong Kong.

Last year, Emirates NBD became the Middle East’s first issuer of offshore yuan bonds as Gulf firms sought to diversify from traditional funding sources in Europe. The 750 million yuan three-year notes had HSBC, Standard Chartered and Emirates NBD Capital as the bookrunners.

However, with Singapore vying to eclipse Hong Kong as a yuan trading hub and London too announcing its plan to join the fray, a Dubai-based economist points out the challenges the emirate faces in becoming a yuan nerve center.

Campbell R Harvey, from the Fuqua School of Business at Duke University in Dubai, says that while Dubai can be a yuan hub because of the increasing importance of trade with Africa and the Middle East in general, the huge growth in US domestic oil production will lead to a decrease in dollar trade with the Middle East.

“Direct yuan trades reduce the cost of doing business,” Harvey says. “Even if Dubai gets (to be the offshore trading) center, it will not be exclusive for long. If China wants to be a world currency leader, it is hard to imagine not having a center in London.”

Managed currency

Besides competition, the other major challenge, Harvey says, is that the yuan is not free floating, but is managed.

It is very unlikely that a managed currency can compete in the long run over the dollar, euro or yen, he points out. “The yuan is not a credible alternative until it is freely floating.”

While policymakers often think that managing currency fluctuations reduces risk, currency traders view this differently, he adds.

“It is risky because it is managed. At some point, when the management stops, there could be a big move. I have long recommended that (the authorities) move sooner rather than later to liberalize their currency regime.

“I think that China realizes this. They are taking small steps towards fully liberalizing.”

Standard Chartered, which became the first foreign bank to be appointed as the agent and settlement bank for yuan cross-border trading in China in 2009 and also the first bank in South Korea to facilitate a cross-border yuan transaction between the two countries the following year, is robustly optimistic.

 “Dubai as a city is qualified to become a yuan hub and we are well positioned to support the government’s plans towards that development,” El Maayergi says.

“At the end of the day, we need to look at the yuan’s global liquidity and acceptance,” adds Standard Chartered’s Tan.

“We see the Chinese government taking steps in the right direction to internationalize the yuan. The opening up of the market will correspond to the pace (at) which this is being done.”