China and UAE ditch US Dollar, will use Yuan for oil trade

[Shotgunner51]

March 2, 2012

Yuan gains ground in trade with Gulf

UAE posts 39% increase in business with China and also improves its standing as a re-exporter

Ajman Bedroom sets, wooden dining tables and made-to-order sofas from China fill the showrooms of Royal Furniture in a dusty commercial district of Ajman.

The sight is common enough in countries across the Arabian Gulf, where booming economies are buying growing volumes of Chinese goods. But in one respect, Royal Furniture is a trend-setter: it pays for a small but significant portion of its products in China's yuan rather than the US dollar, the traditional currency for the region's trade.

For an area that has relied heavily on the dollar for decades — oil, the Gulf's main export, is priced in dollars, and most of its national currencies are pegged to the dollar — the shift is historic, pointing to a slow erosion of the US currency's dominance.

"The negotiations with suppliers are much easier, clearer and more transparent" when conducted in yuan, said Chandrasekaran Krishnamoorthy, director of Royal Furniture.

"They quote me 1,000 renminbi (yuan) [Dh582] and they get 1,000 renminbi. They are protected from exchange-rate risk. I am exposed to exchange-rate risk, but if I ask them, they are going to build it in their prices."

Top market

Commercial practices in the UAE have an impact on the entire Gulf because the UAE is the main trading hub and financial centre for the region. The UAE is China's top export market in the Arab world; China is the second biggest exporter to the UAE, after India.

Trade between China and the UAE expanded 39 per cent from a year earlier to $32 billion (Dh117.50 billion) in the first 11 months of 2011, with Chinese exports growing 28 per cent to $24.3 billion and Chinese imports jumping 89 per cent to $7.6 billion, China's customs data show. Most Chinese goods shipped to the UAE were re-exported to other countries in the Gulf, Africa and even Europe.

The use of the yuan to settle some of this trade marks a success in China's drive to promote the international use of its currency. In 2009, China launched a pilot programme allowing firms in some of its provinces to settle imports and exports in yuan; the scheme has since been expanded nationwide.

Before the programme, companies such as Royal Furniture would have wired payment to China in dollars, requiring the Chinese supplier to convert it into yuan. Now, they can pay directly in yuan from their accounts at banks which participate in the scheme in Hong Kong or, more recently, London.

"One of the advantages of settling in renminbi is that they can access a broader customer base in China," said Janet Ming, who was appointed head of Royal Bank of Scotland's new China desk in London last month.

The transaction time for settlements is shortened substantially and costs for importers of Chinese goods are reduced because suppliers in China no longer add the risk of exchange rate fluctuations as a margin to the price, she said.

So far, the use of the yuan is limited mostly to larger companies in the UAE, mainly retailers and importers of commodities, bankers say. For smaller firms, the effort involved in setting up yuan accounts may be too great; and since the yuan is for now not widely convertible in international markets, it remains easier to do many deals in dollars.

Royal Furniture, which has 12 outlets in the UAE and re-exports products to the Middle East, North Africa and central Asia, says it uses the yuan with about 10 per cent of its top Chinese suppliers.

Tim Evans, regional head of trade and receivables finance at HSBC Middle East, said that while yuan transactions in the region were increasing alongside growth in China's trade with the Middle East and North Africa, they remained small overall.

"Right now, it is still a question of people becoming familiar with it as opposed to seeing very significant volumes of renminbi being traded at the moment," Evans said.

International trade in oil is conducted overwhelmingly in dollars, so there appears to be little prospect of invoicing the Gulf's energy exports to China in yuan any time soon. But the trend towards greater use of the yuan, in the Gulf and globally, is clear. Globally, the percentage of China's trade settled in yuan grew to roughly 7 per cent in 2011 from under 1 per cent in the June quarter of 2010.

HSBC predicts around $2 trillion, or more than half of China's global trade, will be settled in yuan by 2015.

"The interest for renminbi accounts is increasing because the renminbi is appreciating, and because of the financial crisis, the Gulf region is now looking East," said Tian Jun, Bank of China's chief representative in Dubai and Bahrain.

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