Yuan gains strength as a settlement currency



When the US dollar was last threatened by surging interest in an international rival, Shawn Carter - better known as the rapper Jay-Z - caused a minor sensation by ditching the traditional dollar bills in his music videos and instead waving wads of €500 banknotes.

Now banks expect that the rise of China will spur companies to take a leaf from his book and forgo the greenback - this time for the Chinese yuan.

The yuan is expected to become the third most popular currency for trade settlement in the Middle East and North Africa after the dollar and the euro, according to trade data from HSBC. That would put it level with the Saudi riyal and slightly ahead of the UAE dirham.

Banks are expecting yuan-denominated accounts to be opened in greater numbers as UAE companies position themselves for a higher volume of trade with Chinese counterparts.

"Our trade research tells us that the yuan has already overtaken the pound sterling in its use as a settlement currency, and traders are telling us that they expect it be one of their top three settlement currencies this year," said Nicholas Levitt, HSBC's head of commercial banking for the UAE. "And, as trade with Asia increases, so does global interest in this important currency."

Standard Chartered was first into the market last year with yuan-denominated business banking accounts but has since been followed by Industrial and Commercial Bank of China and HSBC.

"It's a bit of a nascent market at this stage," said Motasim Iqbal, the regional head of transaction banking at Standard Chartered. "But the interest level has increased significantly in the last six months alone."

Removing the need to exchange currencies also protects against the risk of a sharp swing in value of one currency - which can potentially leave the exporters out of pocket.

Deposits in yuan-denominated accounts in Hong Kong have soared in the past year as the Chinese government attempts to internationalise its currency and increases the number of provinces and companies that can execute yuan trades with overseas customers.

Deposits in Hong Kong banks surged from 89.7 billion yuan (Dh51bn) in the middle of last year to 451bn yuan in March, according to Standard Chartered.

The bank also expects the cost of borrowing in yuan to fall sharply.

While companies such as McDonald's and Caterpillar have sought to tap Chinese markets in recent years through "dim sum bonds" - yuan-denominated bonds issued in Hong Kong - Gulf companies have not yet jumped on the bandwagon.

But companies could find borrowing costs falling as an increase in deposits provides the Hong Kong loan market with a deep source of liquidity, Mr Iqbal said.

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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