GCC countries are set to witness an increasing level of Chinese currency transactions, according to Crédit Agricole Private Banking.
China is currently the GCC’s largest trading partner and the Economist Intelligence Unit predicts that, by 2020, the largest share of GCC exports will go to China, at around US$160 billion. In turn, China will also dominate the import market, providing about US$135bn of goods to the Gulf, which is nearly double the value in 2013.
“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,” said Davis Hall, Global Head of Foreign Exchange & Precious Metals Advisory, Crédit Agricole Private Banking. “China is also using the region (and particularly the UAE) as a strategic hub for conducting business with Africa and [the] 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.”
Hall said that if the IMF votes the Chinese Yuan as a global reserve currency, its value might outperform GCC currencies over time and “consistently chip away [at] the default position enjoyed by the US dollar as a global reserve currency over the last few decades”.
“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,” he added.
At present, however, the GCC region uses the US Dollar much more than the Chinese Yuan because most GCC currencies are pegged to the US Dollar. Also, the Chinese Yuan is not a fully convertible currency, which limits its attraction as a reserve currency for central banks.
Nevertheless, this present situation could evolve, says Hall, as “the risk-reward balance is less and less tipped in the US Dollar’s favour, beyond the over-obsession for a Grexit eventuality”. This will lead, over time, to several AAA alternative currencies “claw[ing] back lost ground and [surprising] us by year-end, unlike the unilateral dollar dominance of 2014,” he concludes.