The secret of Dubai’s success often lies in its ability to seize opportunities and act decisively before others even come to realise the existence of such potential. By virtue of its status as the leading business, financial and transshipment hub of the region, the emirate might be in the position to play a role in the growing clout of the Chinese renminbi as a settlement currency.

Renminbi is virtually becoming the ‘redback’ of Asia, mimicking the role ‘greenback’ plays in global currency transactions. Over the past few years and particularly in recent months, the Chinese currency has made solid progress in becoming a major settlement currency at least on a regional basis, if not on the global scene.

According to statistics by the Bank for International Settlements (BIS), renminbi now accounts for 2.2 per cent of all foreign exchange transactions and ranks as the ninth most commonly used currency in the world. This may still be far behind the dollar, which accounts for 87 per cent of all transactions, and the British pound, with 11.8 per cent transactions, but given that the process of internationalising the Chinese currency began only in 2009, this is explosive growth. The move by the Chinese government to develop an offshore market for renminbi in Hong Kong was the prime mover of this growth. The Chinese then followed up this with a number of other initiatives, including the opening of the Shanghai free trade zone the other day.

 

Cross-border transactions

According to the latest figures, nearly 50 countries paid more than 10 per cent of their payments with Hong Kong or China in renminbi. While Hong Kong is by far the most important centre for cross-border renminbi transactions, the growing trade involving Chinese products has prompted countries like Taiwan, Singapore and the UK to develop offshore renmimbi clearing centres. This is where Dubai has a great chance.

HSBC, which offers cross-border settlements, along with other banks such as Standard Chartered and Mashreqbank in the UAE, has projected that the equivalent of $2 trillion worth of trade transactions between China and the Middle East will be carried out using renminbi within the next two years. Last year, almost 12 per cent of China’s trade with the Middle East was settled in the Chinese currency; two years ago, this was only 3 per cent.

The bank believes that almost one-third of all imports and exports between China and the Middle East will be settled in renminbi by 2015. Incidentally, HSBC predicts that the Chinese currency could climb to become the third most influential international currency within the next few years.

Trade between China and the UAE has grown by an average 35 per cent every year for the past decade, surpassing $35 billion in 2012, according to the Dubai Chamber of Commerce and Industry. China is only the second country in the UAE’s trade history to surpass Dh100 billion.

Further, about 60 per cent of China’s total trade passes through the UAE, from where it is re-exported to Africa and Europe, making the Emirates one of China’s most important partners and greatest beneficiaries of China’s growth. Even India, which is the UAE’s largest trading partner, relies on Dubai for a significant portion of its Chinese imports.

When Chinese goods pass through Dubai and get re-exported to a third country, for instance, Africa, the two currencies involved are the renminbi and the local African currency, which typically leads to a dollar settlement, with significant cost implications. It is believed that if Dubai can act as an offshore renminbi settlement centre, the transaction can be settled here itself, thus avoiding a third leg of dollar transaction and its cost.

This would prove beneficial to both parties, as well as give a transactional role for Dubai as a hub.

Dubai is already the leading financial centre of the region as well as the most important re-export and transshipment hub; so a transactional role in the region’s trade with China will be a befitting addition to its financial services infrastructure. All that needs to be done is to institutionalise this role.

 

— The writer is a journalist based in Dubai