28/09/2016 04:58 AST
China last week announced it was establishing the first clearing bank for yuan or renminbi (RMB) in the United States.
This is seen as a milestone in the internationalisation of the Chinese currency just before the yuan is due to join a select club at the IMF on October 1.
From October 1, the yuan will be one of the five currencies used by the IMF for issuing Special Drawing Rights (SDR). SDR is a synthetic currency representing five currencies in the IMF basket, which is used for lending funds to countries that need it.
Around that time, the New York branch of Bank of China will start clearing facilities for the Chinese currency.
An important question is what would be the implications of these moves for other countries, including the UAE, who have extensive financial dealings in New York besides selling oil in huge quantities to China.
Data from the global member-owned cooperative and financial messaging services provider SWIFT’s latest RMB Tracker shows exceptional growth in yuan adoption in the UAE, witnessing a 210.8 per cent growth in payments value of the currency since August 2014, albeit from a low base. More than 80 per cent of the direct payments made between the UAE and China/Hong Kong in August 2016 were in yuan, representing one of the highest increases worldwide.
Data within the SWIFT report shows that the Europe, Middle East and Africa region is ranked as number two in yuan adoption after Asia-Pacific.
"RMB adoption in France, Switzerland and Germany is progressing slowly, while the UAE continues to show significant growth – we have seen impressive 44.6 per cent increase in payments value since August 2015," says Alain Raes, the chief executive for Asia Pacific & EMEA at SWIFT.
"We expect this growth to continue in the UAE following the signing of a Memorandum of Understanding in December 2015 for the set-up of an additional clearing centre in the Middle East.
"This will enable even more corporates operating in the region to access RMB products, open RMB accounts and use the currency to make payments to both onshore and offshore counterparts," he says.
Some analysts suspect China will insist on making some of its international payments in yuan while urging its business partners to reduce their reliance on the dollar. Beijing has already entered into 21 currency swaps with different countries, mostly in Asia, to encourage direct dealings instead of using the dollar.
Chinese officials have said a cleaning bank in New York would cut down the transaction costs for companies dealing with customers, suppliers and countries that have yuan reserves.
"This will facilitate all kinds of financial transactions in RMB, including issuing RMB-denominated debt," Scott Kennedy, the deputy director of the Freeman chair in China studies at the Center for Strategic and International Studies, tells The National.
"RMB internationalisation requires deepening of RMB-based financial markets, and this is part of that process."
"This is a long-term process that will take many years; these steps are just erecting the structure for this to occur," he says.
An important issue is whether the rise of yuan including its place in IMF’s SDR basket will prove to be a challenge for the US dollar. Analysts are divided on the subject.
The weight of all currencies in the IMF basket will be eroded to make room for the Chinese currency, which will have 10.92 per cent share. The dollar will be least affected as its share will slide to 41.73 per cent from 41.9 per cent during the last IMF review in 2010, the IMF says on its website.
The National
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