Banking on China’s global ambitions

In 2013, China unveiled a Silk Road plan for the 21st century – a strategy that aims to boost trade and productivity between the country and others across Asia, Africa and Europe.

The strategy, known as the One Belt, One Road initiative, encompasses more than 60 countries – one third of the world’s population – and is worth $1.1 trillion (Dh4.04 trillion) over the next 10 years.

According to mckinsey, it could potentially cover a third of global GDP and a quarter of all the goods and services in the international economy.

Redefining trade

More than 20 per cent of the trade is expected to flow through to the Gulf, into Africa and the Subcontinent as part of the Belt and Road initiative.

“Some of it has already started,” says Asad Ahmed, Managing Director at consultancy Alvarez & Marsal.

“So the question is: How do we get hold of that 20 per cent?”

Analysts say the UAE is well placed to become a hub for the global supply chains of the Chinese economy, with the right air links, ports and infrastructure to facilitate trade.

Already home to the largest Chinese trading hub outside the mainland, Dragon Mart in Dubai, the UAE has 4,200 Chinese businesses operating across the country.

Prime position

China has been the largest trading partner of the Emirates for the past three years, with trade between the countries amounting to Dh520.6billion during 2014-2016, according to the UAE Ministry of Economy. The UAE is also considered a gateway to about 60 per cent of China’s exports to regional markets at an annual volume of exchange worth $70 billion.

“As such, the UAE is well-positioned to be a financial, trading and service hub for this globalisation of the Chinese economy,” says Sudmann.

There have even been moves between the governments of the UAE and China to help facilitate the relationship in the form of a currency swap between the central banks of two countries. It has been limited so far, says Sudmann, but is expected to develop further.

“It certainly will grow. The requests from the Chinese side to increase the payments and the settlement in Renminbi are there.”

Global appeal

There is evidence that it is already growing. “Swift was estimating that 1,900 banks globally use the RMB now for some form of trade settlement,” says Ahmed. “So the important thing is how we can align ourselves to some of the broader ambitions of internationalising the RMB.

“And if we can bring that closer to home, then the RMB trade flows will increase. There is no reason why they shouldn’t.”

Nevertheless, challenges remain. Some companies in the UAE are unsure about how they can access the RMB. A survey conducted last year in the UAE revealed that they felt uninformed about how to use it. And they complained that the benefits – such as lower commissions and prices – of using RMB had not been made clear to them.

“One of the other things that the survey produced was that only 8 per cent of the companies here were actively thinking about how to use the RMB to become part of the One Belt, One Road initiative,” says Ahmed.

He says he has spoken with companies operating in the market that do not seem to be aware of the facilities available. Some banks are, however, working hard to change that.

Currency of choice

Mashreq has put the infrastructure in place to enable its UAE customers to deal in RMB and it is working to educate them about the benefits.

“At Mashreq, we are ready at any time to open RMB accounts for customers,” says Sudmann. “They can execute their payments. They can receive payments in RMB. To that extent, we are ready for our clients at any time. And we expect that it will grow over the years.”

China has been the largest trading partner of the UAE for the past three years

The bank also expects a rise in interest from Chinese-based companies, too, and is ready to serve them.

“The large infrastructure projects, which are on the agenda for the UAE, are seeing substantial interest from Chinese conglomerates, construction and engineering companies,” adds Sudmann.

“That will require various forms of finance and there is clearly a role for the domestic banks and for Mashreq particularly to play a role in these investments. So we are looking forward to it and are actually quite excited about it.”

Customer awareness

Experts say the UAE is already a leading RMB corridor for trade for China and Hong Kong, with RMB clearing and the presence of four Chinese banks. What is needed now is more awareness.

To encourage the use of RMB and capitalise on the UAE’s involvement in the Belt and Road, more financial institutions need to follow the lead of banks such as Mashreq, they say.

“Today there are very few banks offering RMB accounts,” says Ahmed.

“So it is better that they start than it gets prescribed. It will be useful. It’s inevitable. So the earlier we get on to the bandwagon, the better.”