Rise of the redback: a Middle Eastern perspective

This year will mark a milestone in the internationalisation of the renminbi with the Chinese currency set to join the exclusive club used by the International Monetary Fund to determine the value of Special Drawing Rights, its supplementary foreign exchange reserve. 

This official recognition of its growing role in international trade and finance has been actively fostered by China, which has facilitated the settlement of trade transactions in renminbi, allowed the offshore issuance of renminbi-denominated bonds and holding of deposits, as well as set up local currency swap lines with other central banks. 

China has swiftly become the Gulf Arab states’ single most important trade partner, replacing the US and Europe. It is becoming the main external investor as the economies of the Gulf Cooperation Council (GCC) remove restrictions on foreign investment and diversify their economies. 

Given its location at the mouth of the Gulf, international connectivity, growing linkages to Africa, and the quality of its infrastructure, the United Arab Emirates is now the logistics hub for China: some 70% of Chinese exports are re-exported via the UAE to the other GCC countries, as well as east and north Africa, India, and Iran. But these are still timid steps on a long road of historical rediscovery.

Active steps need to be taken for the GCC banking and financial system to be more fully integrated into the emerging redback zone, where payments, capital markets, banking and financial assets, and transactions will increasingly be based on the renminbi. 

As Western banks and financial institutions face growing regulatory constraints, restructure, overcapitalise, retrench, and divest assets in the Middle East, so Chinese and Asian banks need to seize the opportunity by replacing them in their traditional role of financing trade and investment in the Middle East. 

The cornerstone will be financing trade.  The GCC and China should finalise their Free Trade Agreement, which has unduly lingered in negotiations. The renminbi should be used to finance, clear, and settle trade between the Middle East, GCC and China. It is economically inefficient to use dollars and euros to finance GCC-China trade and investment links. 

There is also no economic or financial reason why oil should not be priced and settled in renminbi. This would create the basis for an active foreign exchange market in renminbi and lower transactions costs and diminish risks. 

Renminbi liquidity is being established. The People’s Bank of China has established bilateral renminbi swap lines with the UAE and Qatar, which create the financial facilities to enable trade and investment transactions. China is establishing official renminbi clearing arrangements in Qatar, in addition to extending the Renminbi qualified foreign institutional investors (RQFII) pilot scheme with an initial quota of Rmb30 billion ($4.8 billion). 

Renminbi swap lines should be extended to the other GCC central banks. With GCC countries accounting for about 2.5% of China’s total trade, a GCC-China renminbi swap line would amount to about Rmb180 billion to Rmb200 billion.

As Asian and Gulf countries become increasingly integrated into China’s global supply chain, the renminbi will be increasingly used to finance trade along the new “Silk Road Economic Belt” unveiled by President Xi Jinping in 2013 to establish new trade and transport links between China, Central Asia and Europe. But China needs to accelerate development of its redback bond market and provide greater access to the countries of the GCC, which need renminbi-denominated assets as part of their international reserves. As such, China should invite the GCC to participate in the Asian Infrastructure Investment Bank and extend its scope to the Middle East. 

The redback cometh and it is likely to cause the biggest disruption to international financial markets in the coming decade.  

Saidi is the founder and president of Nasser Saidi & Associates and acts as adviser to governments, central banks and regulators. He is a member of the IMF’s Regional Advisory Group for MENA and co-chair of the Organisation of Economic Cooperation and Development’s MENA Corporate Governance Working Group. Saidi was the Minister of Economy and Trade and Minister of Industry of Lebanon between 1998 and 2000.