· GCC to witness more Chinese Yuan transactions in trade and investments
· A low oil price and strengthening US Dollar scenario could be a game changer
· Risk-reward balance is less tipped in USD’s favour, and over time several ‘AAA’ currencies could gain back lost ground
A forex expert from Crédit Agricole Private Banking commented at a media roundtable today that the GCC countries are set to witness an increasing level of Chinese currency transactions, to support the growing cross-border trade and investment flows between China, GCC and the wider Middle East region.
“As the GCC’s largest trading partner, China is seen more to play an important role in the region’s businesses, and particularly in regards to commodity related activities and joint infrastructure investment projects. China is also using the region (and particularly the UAE) as a strategic hub for conducting business with Africa and wider Middle East. In this background, it can be said that China is increasingly becoming a major stakeholder for the GCC region. To further facilitate cross-border synergies, the adoption of the Chinese Yuan by local businesses would further boost trade and investments between China and the GCC countries”, said Davis Hall, Global Head of Foreign Exchange & Precious Metals Advisory, Crédit Agricole Private Banking.
Over the last few decades, China has become one of the world’s largest consumers of industrial commodities, with a global consumption level of 46%. This is leading to the upcoming IMF approval vote in November 2015 in regards to the Chinese Yuan’s status as a potential global reserve currency. If the IMF votes the Chinese Yuan as a global reserve currency, its value may outperform GCC currencies over time and consistently chip away the default position enjoyed by the US dollar as a global reserve currency over the last few decades.
Davis Hall continued, “The inevitable albeit gradual internationalisation of the Chinese Yuan will steadily attract investors of all sorts to this counterbalancing global reserve alternative. Many countries are recognising this eventuality and setting up necessary platforms to fully leverage existing and future trade relationships. Interestingly, Qatar recently set up the region’s first offshore Chinese Yuan clearing centre to facilitate greater trade and economic links between China and the GCC region.”
At present, the hydrocarbon economies of the GCC region use the US Dollar much more than the Chinese Yuan as most GCC currencies are pegged to the US Dollar and it is the default currency for oil trading. This oil-USD-peg connection also leads GCC countries to hold most of their huge forex reserves in US Dollars. Another aspect is that currently the Chinese Yuan is not a fully convertible currency which limits its attraction as a reserve currency for central banks.
