China Power

Belt and Road Brings Chinese Finance to the Gulf

The Gulf is emerging as an important center in China’s efforts to internationalize its currency and financial dealings.

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Belt and Road Brings Chinese Finance to the Gulf
Credit: Pixabay

During his meeting with the King of Bahrain, Sheikh Hamad bin Isa al-Khalifa, in 2013, Xi Jinping stated that China would deepen financial cooperation with Gulf countries. In recent years, this intention has been realized. With the Belt and Road Initiative (BRI), China has been expanding its financial foothold in the Gulf region, which is positioned as one of the most crucial financial hubs in the world.

While Chinese finance has been present in the Gulf since the early days of China-Gulf relations, Xi, with his assertive financial reforms, including greater integration in the global financial economy, aims to reinforce this process through the BRI.

Growing Presence and Bond Markets

Corresponding to the BRI’s official “Vision and Action” document, which states that “financial integration is an important underpinning for implementing the Belt and Road Initiative,” Chinese banks and financial institutions have increased their cross-border financial transactions, presences, and activities in the Gulf region.

This is particularly apparent in the UAE, the Gulf’s most important financial center. According to the Dubai International Financial Center’s (DIFC’s) 2015 annual Operating Review report, banks from China had doubled their balance sheet since mid-2014. In 2018, it was further reported that Chinese financial entities make up nearly a quarter of the total assets in the DIFC, with total value reaching $33.4 billion by September 2017, a 30.5 percent increase from the $25.6 billion reported at end of 2016. Additionally, Chinese banks have also elevated their licenses with the DIFC to Category 1, changing their presence from subsidiary to branch status.

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Moreover, following the direction in the BRI “Vision and Action” plan to “open and develop a bond market,” these banks have increased their issuance of bonds in the region.

In October 2016, the Hong Kong branch of the China Construction Bank (CCB) listed a $600 million bond on Nasdaq Dubai, the Gulf’s global financial exchange. In the same month, the Agricultural Bank of China (ABC) was approved by Dubai Gold and Commodities Exchange (DGCX) as the first listed market-maker for Shanghai Gold Futures.

The Industrial and Commercial Bank of China (ICBC), after upgrading its branch’s services from strictly commercial to providing investment banking and asset management to its Gulf clientele, also listed a $400 million bond on Nasdaq Dubai in mid-2017. That made for a total of five ICBC bonds listed on DGCX, after the listing of a $500 million bond in May 2015 and a $400 million bond in June 2016.

Not long afterwards, the CCB listed another $1.2 billion bond in Dubai. The CCB’s chairman, Guo Yuo, stated that the bonds are intended to support the bank’s activities in the region under the BRI. In March 2018, the ICBC also raised $1.4 billion through the issuance of two bonds on Nasdaq Dubai, which brought the total amount of bonds issued by Chinese banks via the exchange to $5.4 billion.

Institutionalizing Financial Relationships

China’s financial expansion in the Gulf has also been institutionalized. For example, the Shanghai Stock Exchange partnered with the Abu Dhabi Global Market (ADGM) in April 2018 to develop a platform in the UAE known as the “Belt and Road Exchange,” aimed to support Chinese investors and businesses in the Gulf.

Although to date there are no specifics regarding the platforms via which the new exchange would trade, or when it might be opened, we do know that the future exchange aims to help Chinese enterprises finance investments undertaken as part of the BRI. A few months later, the ADGM launched its first overseas representative office in Beijing.

Similarly, in 2017 Shanghai Gold Exchange partnered with the DGCX to establish DGCX Shanghai Gold Futures, which saw the first-ever use of the Shanghai Gold Benchmark Price in global markets.

In July 2018, Chinese state-owned Everbright Group, which operates across banking, securities, asset management, insurance, and funds as well as in futures and investment management, also signed an MoU with the DIFC to explore collaboration opportunities related to the implementation of the financial aspects of the BRI.

Currency Expansions

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Such moves have also been accompanied by efforts to expand the use of Chinese currency in the Gulf.

The BRI is intended to complement the ongoing strategy to globalize the Chinese renminbi (RMB), a process that began in 2009 and still faces obstacles. The “Vision and Action” plan states that the BRI aims to establish currency swaps and settlement mechanisms, to uplift the status of the RMB as an international reserve currency, and to incorporate the RMB in the IMF’s Special Drawing Rights (SDR) basket of currencies, a goal that was achieved in 2016.

In the Gulf, this intent was echoed by Xi in his speech at the Arab League headquarters in 2016. A number of Chinese banks have responded to Xi’s call by becoming active in promoting the use of RMB in the Gulf, mainly through currency swaps and trade settlement deals.

The People’s Bank of China (PBOC), for example, signed a 35 billion RMB ($5.6 million) currency swap deal with Qatar Central Bank (QCB). The PBOC has also renewed its $5.42 billion currency swap agreement with the UAE, after the latter was included as a RMB Qualified Foreign Institutional Investor (RFQI) with a quota of 55 billion RMB, paving the way for the Central Bank of the UAE to invest in China’s capital market.

Furthermore, the ICBC has also decided to join the Dubai Commodities Clearing Corporation (DCCC), turning itself into a settlement bank for DGCX, and the Chinese bank has been reportedly pursuing negotiations with Gulf governments and entities about issuing RMB bonds in China.

Besides currency swap agreements, RMB clearing centers have also been established in the Gulf. In 2015, the ICBC founded a renminbi clearing center in Doha, which became the first in the Gulf to allow trade priced in RMB to be cleared locally. This helps make the renminbi “trade invoicing currency” in the Gulf. Banks in the Gulf are now able to skirt various custodial relationships with banks in Hong Kong to access currency at the Doha branch. This also effectively enables the creation of a pool of liquidity in renminbi, thereby enabling a push for trade across the wider region.

A year later, the ABC was also appointed by the PBOC to operate another renminbi clearing center in Dubai.

Though still limited, these developments have gradually expanded the popularity and use of Chinese renminbi in the Gulf. HSBC’s RMB Internationalization

Study found that there has been a noticeable increase in the number of UAE businesses using the renminbi – from 34 percent in 2015 to 46 percent in 2016. In January 2016, the RMB had also become the most active currency used in the UAE and Qatar for direct payments to China and Hong Kong and the rate of using the renminbi in direct payments between Kuwait and China exceeded 10 percent. Lately, Saudi Arabia has also declared that the country is currently preparing for renminbi funding.

China’s Belt and Road is usually thought of in terms of literal roads, ports, and bridges. In the Gulf, however, it’s taking a different form as China pursues increased financial cooperation with a globally important financial hub.

Dr. Muhammad Zulfikar Rakhmat is a lecturer at Universitas Islam Indonesia and a research associate at Jakarta-based Institute for Development of Economics and Finance (INDEF).