Dubai: The Dubai International Financial Centre's move towards becoming the Middle East's clearing hub for offshore yuan transactions reflect the rising links between the region and China, analysts said.
Bankers said the plan is in the final stages and the financial centre is likely to start yuan transactions as early as this year, subject to regulatory clearances. Once the yuan settlement comes into force, it will allow financial institutions operating in the DIFC to settle their transactions in yuan along with other international currencies such as the dollar and euro.
"We are working on a plan to become a clearing hub for yuan settlements in the Middle East by 2015. I can't say when exactly we will start clearing in yuan," said Nasser Saeedi, chief economist of the DIFC.
The GCC has been rising in stature as a major trading partner for China with Saudi Arabia and the UAE among its top 20 major trading partners. According to a recent study by the DIFC, it is in the GCC's strategic interest to move towards greater economic and financial integration with China through free trade agreements, establishing links between financial markets, finance bilateral trade using the yuan and establishing yuan swap lines with GCC central banks.
"The growing trade and investment links between the GCC and China create an opportunity for the DIFC to become a payments clearing centre for the yuan in the region. The DIFC has the infrastructure, laws and experienced international banks and financial institutions with extended networks of correspondents for the DIFC to become the Mena region's clearing centre for the yuan market," said Saeedi.
Gradually easing
International banks such as HSBC and Standard Chartered are already offering cross-border trade settlements in yuan in the Middle East. Once the DIFC becomes an offshore yuan hub, more institutions are likely to join the fast-growing yuan trade settlement market.
The yuan is not yet fully convertible but Beijing has been gradually easing its capital controls since 2009, allowing companies to settle trade in yuan and to use yuan for mainland investments.
To date, there have been three main channels of yuan internationalisation: The introduction of the yuan as the settlement currency for cross-border trade transactions, the provision of yuan swap lines between the People's Bank of China (PBoC) and other central banks, and the creation of a yuan offshore market.
Although the DIFC has the infrastructure in place to start clearing in offshore yuan, it must get the necessary regulatory clearances from the UAE Central Bank and the Dubai Financial Services Authority.
While Hong Kong has emerged as the premier off-shore yuan clearing centre, Singapore and London are fast emerging as big players in this segment.
The yuan offshore market is also fast emerging as a new liquidity pool for international companies to raise funds. This week Emirates NBD said it has mandated banks to arrange investor meetings in Hong Kong and Singapore to raise funds through off-shore yuan bonds, popularly known as dim-sum bonds.
Analysts say more issues from the region could be in the pipeline. "The so called dim-sum bonds are becoming a more common occurrence for corporates and financials globally," said Abdul Kadir Hussain, chief executive of Mashreq Capital.
