The use of Chinese currency in cross-border trade transactions between the GCC and China is growing, but remains limited.
China has been promoting the use of its currency in cross-border trade since it launched a pilot project in 2009. So far, most cross-border renminbi (RMB) transactions take place between companies in China and other Asian countries and it is only beginning to gain ground in the Middle East.
A representative from a Chinese company active in the Middle East and North African (Mena) region told delegates gathered at an HSBC workshop held in Dubai that his company had not even used the RMB account it opened to support its business in the region.
In contrast, he said his company regularly closes trade deals in Chinese currency in Africa and South East Asia.
“It is the uncertainty of not doing it before”, which is the key challenge, says Tim Evans, head of trade & receivables finance, Middle East & North Africa at the UK’s HSBC.
As well as a general lack of awareness about settling deals in RMB, the use of Chinese currency is likely to be more popular in certain regions in the Middle East compared with others, Evans says.
“In the Middle East you have a two-tiered story. You have some GCC countries where their currency is pegged to the dollar and countries where their currency is not pegged to the dollar,” he says.
“In the short-term I am seeing a stronger receptivity [to the use of RMB] in countries where the currency is not pegged to the dollar than here in the UAE.
“We have some customers in the UAE that have started discussions and completed transactions, but the initial reaction is why would I do it when my currency is pegged.”
Companies in countries with dollar-pegged currencies often do not see the need to use RMB in trade deals with China as they already have limited exchange risk.
In countries such as Algeria and Lebanon, traders already have to deal with the volatility of their currency against the US dollar and the RMB, and therefore are more likely to see the advantages of settling deals in Chinese currency.
Research by UK bank HSBC finds that there are several benefits for Middle East customers to settle trade deals with Chinese clients in RMB.
The US’ Western Union Business Solutions estimates that small and medium-sized companies in the Mena region could achieve $3bn-worth of savings next year, if they were to accept RMB.
Chinese exporters will often incorporate the risk of foreign exchange into the prices they charge their customers. They will often increase prices by an average of 3 per cent through fees or surcharges if they receive payment in dollars.
The use of RMB does not only offer cost-saving benefits, it could help Middle East exporters beat off competition and win contracts with Chinese firms.
Dubai would be particularly benefit from companies being able to offer their Chinese clients the ability to close trade deals in RMB, particularly if the emirate is positioning itself as a global trading hub such as Hong Kong and Singapore, Evans says.
The ability for companies within the UAE to settle trade transactions in RMB has been helped by a currency swap agreement signed between China and the UAE at the beginning of last year.
The RMB35bn ($5.54bn) deal improves the availability of Chinese currency in the UAE, which should make it easier for local traders to borrow RMB to settle their trade with China.