By Santhosh V Perumal/Business Reporter


The Gulf countries are set to witness an increasing level of Chinese currency transactions to support the growing cross-border trade and investment flows between China, the Gulf and the wider Middle East region, according to Credit Agricole.
“As the GCC’s (Gulf Cooperation Council) 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,” Davis Hall, global head of foreign exchange and precious metals advisory, Crédit Agricole Private Banking, said.
Highlighting that the Asian country is also using the Gulf region as a strategic hub for conducting business with Africa and wider Middle East; he said against this background, China is increasingly becoming a major stakeholder for the GCC region.
The inevitable, albeit gradual, internationalisation of the Chinese currency will steadily attract investors of all sorts to the counterbalancing global reserve alternative, he said, adding 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 renminbi clearing centre to facilitate greater trade and economic links between China and the GCC region, he said.
At present, the hydrocarbon economies of the GCC region use the dollar much more than the Chinese denomination as most GCC currencies are pegged to the dollar and it is the default currency for oil trading.
This oil-dollar-peg connection also leads GCC countries to hold most of their huge forex reserves in dollars. Another aspect is that currently the Chinese currency is not a fully convertible currency, which limits its attraction as a reserve currency for central banks.
“Nevertheless this present situation could evolve as cross-border trade (oil and non-oil) volumes rapidly grow. With the recent trends in oil prices, never before has the price evolution of a single commodity so directly influenced the foreign exchange markets,” Hall said.
The knock-on effects of Opec’s (Organisation of the Petroleum Exporting Countries) decision to protect market share and maintain output levels last November has sent shock waves and foreign exchange dominos falling, he said. The impact of this oil-specific catalyst has served to draw the sleepy forex markets out of hibernation and into trending motion. The undesirable side-effect has been to see a resurging dollar with all the pegged GCC currencies in tow, according to him.
“In a low-oil-price-and-strengthening dollar scenario, there is a lot of pressure on Opec as it goes into its June meeting. The GCC countries are essentially dollarised economies, and Opec has to carefully examine its output strategy decision as it could be crucial for this region,” he said.
Moreover, there is also the upcoming detente in Iran and this is yet another potential headwind for oil given its effect on the already precarious supply-demand calculus, he added.