Dr. Nasser Saidi: APEC And Renminbisation

The Asia Pacific Economic Cooperation (APEC) meeting, held last month for the first time in Beijing, underscored the ongoing shift in the global economic ecosystem, heralding a new world order.

The APEC meeting, a regional trade gathering that is most often low-key, was significant this time with China signing free-trade agreements with South Korea and Australia, and initialing an agreement on reduced carbon emissions with the US.

More important for economic integration was the announcement of $40 billion in investments towards a new commercial “Silk Road” that will run overland through Central Asia and Russia through to Europe – to “break the connectivity bottleneck in Asia”– while a “Maritime Silk Road Bank” would reduce China’s dependence on European shippers and revive sea lanes through South-East Asia to the Middle East and Africa.

President Xi Jinping also called for a move towards a Free Trade Area of the Asia-Pacific (FTAAP) – noteworthy as the 21-member grouping accounts for nearly half of global trade.

As the balance of power shifts east and China strategically positions itself to overtake the US to become the largest global economy, the significance of the new Silk Road infrastructure fund intensifies.

Investments into the new Silk Road will complement the establishment of the BRICS bank to be the basis of greater regional economic integration through the ‘Silk Road Economic Belt’ and associated new global value chains.

The whole process of producing goods, from raw materials to finished products, is increasingly carried out wherever
the necessary skills and materials are available at competitive cost and quality.

Comparative advantage is increasingly about participation in new global value chains.

An OECD report reveals that a country benefits not only from improving its own supply chain conditions, but also from the reforms of its partners acting in concert.

It estimates that greater trade facilitation would increase China’s GDP by 10 per cent (measured against a 2007 baseline). The clear implication for the GCC and the UAE – which is the regional transport and logistics hub – is the need to integrate their infrastructure into China’s New Silk Road and its global value chain.

Renminbisation and the emeRging Redback Zone

The Silk Road integration of physical infrastructure is being accompanied by an emerging Redback Zone and internationalisation of the Renminbi, or ‘Renminbisation’.

Asia, and specifically China are developing new building blocks for capital markets – the new Hong Kong- Shanghai link opens China for portfolio investment and enables it to export capital under its own rules.

Investments in financial infrastructure including regional payments and settlement systems, harmonisation of financial standards and practices (including the regulatory and supervisory regime) and building the institutional capacity of domestic financial intermediaries are gradually leading towards greater integration of Asian capital markets.

China’s liberalisation and opening up will cement this integration and will eventually establish a Renminbi Redback Zone.

Renminbisation has been accelerating since 2013: China has liberalised the offshore Yuan market and expanded offshore RMB centres to Taiwan, London and Singapore, under the RMB Qualified Institutional Investors Scheme.

Most recently, China signed bilateral currency swap agreements with Qatar and Australia to improve the liquidity of offshore RMB, underscoring its commitment to internationalise the currency.

The agreement with Qatar is important given that on the same day, a MoU was signed on establishing RMB Clearing

Arrangements in Qatar in addition to extending the RQFII Pilot Scheme to Qatar with an initial quota of 35 billion yuan.

Standard Chartered bank forecasts that by 2020, some 28 per cent of international trade will be denominated in RMB and by 2015 more than half of China’s trade with emerging markets will be settled in RMB.

Given that China is the biggest consumer of oil from the Gulf nations, the GCC needs to rapidly become part of the Redback zone.

THE GCC AND THE SILK ROAD ECONOMIC BELT

What should the GCC do to be part of the Silk Road Economic Belt? There are several building blocks, some of which I list here.

A China-GCC Free Trade Agreement: Bilateral trade has been steadily multiplying, from a mere $9 billion in 2001 to just over $155 billion in 2013, with oil accounting for bulk of the exports from the region.

McKinsey forecasts that by 2020, total trade flows between China and the Middle East will mushroom to between $350 to $500 billion, with China-GCC trade accounting for the majority share.

The launch of China-GCC FTA negotiations was announced in July 2004. Ten years later, the two parties have held five rounds of negotiations and though agreement is in place on the majority of issues concerning trade in goods,
the FTA remains a work in progress. Acceleration of the negotiations is needed.

The China-GCC FTA should be a trade policy priority. It is easier to implement given an industrial organisational structure dominated by state owned and government related enterprises in both China and the GCC countries.

Renminbi payments integration: The Yuan is already one of the 10 most-used currencies for payments worldwide. From just 3 per cent in 2010, the RMB is now used to settle around 24 per cent of China’s total trade.

By 2015 it is likely that the IMF will revise its Special Drawing Rights (SDR) basket to include the RMB reflecting the weight of China in global output and trade and the growing international convertibility of the Yuan.

The Yuan will be de facto recognised as an international currency. The People’s bank of China has now signed some 28 bilateral currency swap agreements with central banks, including with the UAE and Qatar to the tune of 35 billion yuan each.

These currency swap agreements facilitate bilateral trade by providing liquidity when required. ICBC’s Doha branch was recently appointed the clearing bank for Yuan deals, which reduces transactions costs and trading time.

Given the growing level of China-GCC trade, a growing share will be cleared using RMB and eventually GCC oil and
gas exports will be priced in Yuan.The GCC needs to take active steps to facilitate the use of the RMB and integrate it into the region’s payment systems.

Partner in the new ‘Silk Road Fund’ and the BRICS Infrastructure bank: The GCC countries have a strategic interest to participate in building the infrastructure of the new Silk Road Economic Belt.

Gulf countries have rapidly growing economic relations with China, India, Japan, Korea, Singapore and other Asian countries and possess substantial international reserves. The GCC should offer to partner and invest in the BRICS bank and Silk Road Fund and extend the infrastructure investment programme to the MENA countries.

The coming decades will witness a new multipolar world economic order, with a growing focus on Asia and global value chains emerging from the Silk Road Economic Belt.

The Renminbi and its Redback Zone will provide the financial infrastructure for Asian capital markets. It behooves the GCC countries to actively engage in building the new economic order and become the Middle East hub of the Silk Road Economic Belt.