China set to choose yuan clearing bank for UAE by 2016-end

China's central bank is expected to pick a Chinese lender to clear yuan transactions in the United Arab Emirates by the end of the year, which would strengthen the growing economic ties between China and the Middle East, a Chinese banking executive said.

Qatar opened the region's first yuan clearing centre in April last year, with Industrial and Commercial Bank of China (ICBC) becoming the clearing bank.

A clearing centre can handle all parts of a currency transaction from when a commitment is made until it is settled, reducing costs and time taken for trading.

A clearing bank in the UAE could have a big impact on trade and investment in the Gulf because Dubai acts as the region's top business centre, handling flows of money and goods to countries in the six-nation Gulf Cooperation Council and beyond.

"In this region everyone thinks of Dubai as the hub for the whole of the Middle East," Fang Min, senior executive officer of Agricultural Bank of China (ABC), said in an interview.

"From an economic and financial centre point of view, Dubai is the most appropriate (place) to set up an offshore renminbi market."

Fang said one of the big four Chinese banks - ABC, ICBC, Bank of China and China Construction Bank - would become the UAE's yuan clearing bank. He did not elaborate.

Partly because of the UAE's role as a trans-shipment point for goods to the rest of the Gulf, trade between China and the UAE was estimated at $60 billion last year, up from $47.6 billion in 2014, Dubai International Financial Centre (DIFC) figures show.

SWIFT

The UAE is already the most active country in the Middle East in using yuan for direct payments to China and Hong Kong. In 2015, the currency was used for 74 per cent of payments by value from the UAE to China and Hong Kong on the Swift international transactions network.

Overall, the U.S. dollar is still used for most trade between the Gulf and China, and China's payments for its oil imports from the region are believed to be denominated in dollars, the main currency used in global oil trade.

Nevertheless, Fang said he expected the UAE's ratio for Swift direct payments in yuan to rise to 80 or 85 per cent by 2020.

The UAE centre "will provide local Chinese companies, as well as UAE companies and companies from other regions, with renminbi liquidity for trade settlement, investment."

Qatar has become ICBC's third-largest overseas clearing centre globally behind Singapore and Luxembourg, handling 350 billion yuan ($52.6 billion) in transactions since it launched, said Zhou Xiaodong, general manager of ICBC's Dubai branch.

Last December, China said the UAE would be included in its Renminbi Qualified Foreign Institutional Investor scheme with a 50 billion yuan quota, allowing UAE-based institutions to channel offshore yuan holdings into Chinese securities. The UAE clearing centre could make it easier for UAE investors to do this.

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