By Dr Arno Maierbrugger
They US dollar has had some of its worst weeks in months after series of bad news including the US government shutdown, weak employment figures and concerns about the Fed’s bond buying programme. The greenback is now hovering around a two-year low against the euro, its most important counterpart so far, dragging down all the Gulf currencies that are pegged to it.
How to escape this trap? While de-pegging Gulf currencies from the US dollar will not happen in the foreseeable future because of the oil trade – and Kuwait’s bad de-pegging experiences-, but forward-looking economists are already predicting that a shift in the world’s major trade currencies will only be a matter of time. And China is gearing up with its yuan renminbi.
China has already overtaken the US as the world’s largest oil importer and goods trading nation. Over the next five years, it will surpass the rest of the world combined in its consumption of base metals which are today also mainly traded in US dollars. Given the scale of the country’s consumption of fossil fuels and raw materials, it is therefore really only a matter of time before the renminbi replaces the US dollar as the primary currency for trading commodities and resources such as crude oil and iron ore.
And this will be the time when Gulf countries - especially Qatar which is shifting its LNG trade increasingly to East Asia - will have to take action. Chinese state media are already calling for a “de-Americanised world” where the renminbi replaces the dollar. In the recent past, China has established a number of trading markets outside the country for its currency, with Singapore standing at the core.
Britain two weeks ago said that direct trading between the renminbi and the British pound will be allowed. China also has similar direct trading arrangements for the renminbi with the Japanese yen and the Australian dollar, underlining its ambition to take on a bigger role in international financial markets.
For Gulf investors, Singapore will be the place to go for the Chinese currency. China and Singapore just earlier this October agreed to allow full direct trading between each other’s currency. The move, along with other agreements on financial cooperation, is expected to bolster Singapore’s status as a leading offshore trading centre for the renminbi.
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Our columnist Dr Arno Maierbrugger is Editor-in-Chief of www.investvine.com, a news portal owned by Inside Investor focusing on Southeast Asian economic topics as well as trade and investment relations between Asean and the GCC. The views expressed are his own.
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