In April this year, Saudi-based water power generator, ACWA Power, obtained its first equity bridge loan, 50% of which was denominated in Renminbi, with the other half in US dollars. The total $80 million of proceeds will be channelled to fund the firm’s solar and battery energy system projects based in Uzbekistan.
The transaction was significant as the first Rmb financing facility between ACWA Power and a Chinese financial institution, and also as the first one between a Saudi corporate and a Chinese bank. The initial agreement was reached during the third Belt and Road Forum in October 2023, according to a press release from the firm.
The forum was initiated by China to push economic collaboration among countries based in Southeast Asia, central Asia, Africa, Latin America, and the Middle East. The idea was first raised by Chinese president Xi Jinping to develop an expanded and interdependent market for China across the region, with the Middle East being a hot topic in recent years.
China is building up its ties with the Middle East region, with views to seek new economic and trade partners away from the US and more developed western markets. The group of wealthy governments and investors in the Gulf region, who have been reliant on the oil trade, also wanted to diversify their strategies, looking at other industries.
In this feature, FinanceAsia asked market experts whether the growing collaboration between China and the Middle East region works well for both sides, and how China’s currency fits in the picture, especially with China seeking to internationalise the use of Renminbi in the long run.
Ambition
Xi himself paid a milestone visit to Saudi Arabia in December 2022, meeting with the Saudi leader Mohammed bin Salman and attending the first China-Arab States Summit and China-Gulf Cooperation Council (GCC) Summit in Saudi’s capital, Riyadh.
In his speech, Xi vowed for greater collaboration between the two regions in terms of energy; financing and investment; innovation and technology; aerospace; and, language and culture. Oil and gas settlement with Rmb through the Shanghai Petroleum and Natural Gas Exchange was mentioned as a priority area, aiming to replace the US dollar in bilateral trades.
The Middle East has traditionally relied on oil exports to the rest of the world. Saudi Arabia, for example, exported $236 billion worth of crude petroleum in 2022, with China ($68 billion), India ($46.2 billion), Japan ($36.5 billion), South Korea ($36 billion) and the US ($23.9 billion) being the largest buyers. As the world’s largest exporter in crude petroleum, the product accounted for over 65% of Saudi Arabia’s total exports that year.
Such crude petroleum transactions are settled predominantly in US dollars. Despite a lack of disclosure on how much of the bilateral crude petroleum trade between China and Saudi is settled in Rmb, China’s Rmb Internationalisation Report revealed that the cross-border settlement of the currency during trade with countries in the Belt and Road Initiative (BRI) during the first nine months of 2023 stood at Rmb2.3 trillion ($317 billion), almost a third of the total Rmb7.7 trillion world-wide.
China has been increasingly exploring the use of Rmb in cross-border trade settlements and investment flows, particularly with countries participating in the BRI, said Redmond Wong, chief China strategist at Saxo Markets. The world’s second largest economy has established bilateral swap lines with central banks of 40 countries and Rmb clearing houses in 29 markets, as an example.
In November 2023, the central bank of the United Arab Emirates (UAE) signed an agreement to extend its currency swap arrangement with China for another five years, at a nominal value of AED18 billion ($4.9 billion), or Rmb35 billion. Saudi Arabia and the People’s Bank of China signed another three-year local currency swap agreement worth 26 billion Saudi riyals, or Rmb50 billion.
Dalia Nammari, Dubai-based capital markets partner at Linklaters, told FA that at this stage, closer ties with the Chinese market is mostly ‘government-driven’ in the ME region, with high level MoUs being signed, summits held, and cultural exchange intensified.
“We’ve already seen a lot of high-level interaction between the two regions. Our expectation is that in time this would trickle down to corporates and financial institutions, before necessary regulatory frameworks and infrastructure are put in place to support Renminbi transactions and investments,” she said.
Financial institutions have been quick off the mark. Some of the biggest Chinese banks, which include Bank of China (BoC), China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC), have been expanding their presence in the region. Non-bank China International Capital Corporation (CICC) also announced the opening of two Middle East offices in UAE and Saudi targeting these markets.
Rola Abu Manneh, chief executive officer of Standard Chartered in the UAE, Middle East and Pakistan, told FA that the global bank’s network witnessed a 67% year-on-year surge in income from the China-AME corridor for the financial year 2023.
Based in UAE, hailed as the regional offshore Rmb centre, Abu Manneh said that the bank holds a strategic focus on supporting the trend of more trade and funding activities denominated in Rmb.
“Along with the trend of international expansion of Chinese corporates, we believe that the UAE is the leading offshore Rmb centre in the Middle East, especially with the UAE being a hub for capital, trade and personal mobility between China and the region,” she said. The bank is ambitious on providing greater connectivity between the Middle East region with both mainland China and the Hong Kong market.
On the other side, other financial institutions in GCC countries’ home markets, such as the likes of Qatar National Bank, First Abu Dhabi Bank and Saudi National Bank, are increasingly looking to build Rmb issuance capabilities.
Linklaters’ Nammari said that the team routinely receives requests from clients to weave Renminbi-specific functions into their infrastructure. One example is incorporating Hong Kong’s debt securities clearing system, Central Moneymarkets Unit (CMU), into debt and sukuk issuance programmes.
Diversifying
Diversified sources of funding and exposure to a wider non-domestic investor base is one of the considerations driving Rmb issuance for Middle Eastern issuers, Nammari said.
For example, a great amount of funding is needed for Saudi’s Vision 2030, a nation-wide campaign that seeks to build a more diverse and dynamic economy through driving growth in new industries and attracting foreign investment. A key area where Saudi sees opportunities in collaborating with China is clean energy and green infrastructure.
Liuyang Li, chief analyst of FX strategy at CICC Research, said that the team ‘positively views’ interest in Rmb and related assets from Middle Eastern-based investors, with opportunities in energy cooperation, infrastructure projects and their diversification strategies.
For example, “China’s infrastructure companies are having Middle Eastern project orders. These investment projects can be priced, settled or financed with Rmb,” he explained.
Peter Cullen, Linklaters’ Dubai-based capital markets counsel, said that the team is observing a growing Middle East investment in Chinese equities, both listed and private. In addition, more Chinese investors are more frequently appearing as bidders for Middle East assets.
Such activities are supported at a political level, he added.
“For example, in trade talks on May 31 between Dr. Thani bin Ahmed Al Zeyoudi, UAE minister of state for foreign trade, and Wang Wentao, Chinese commerce minister, focused on priority areas such as aluminium, communications, iron and steel, financial services, aviation, free zones and industry.”
The growing popularity of Rmb is also partly due to the high funding cost of the dominant US dollar, as the Fed holds interest rates higher for longer. While the US Fed had kept an interest rate of 5.5%, at the time of press, the People’s Bank of China (PBOC) has maintained a 3.45% loan prime rate (LPR), creating a remarkable yuan/dollar spread, making the Chinese currency attractive in terms of funding costs.
“The interest rate spread between Renminbi and US dollar has offered an opportunity for the Chinese currency to become a more popular funding currency,” said Zhengwei Lu, chief economist at China Industrial Bank. On top of that is a relatively weak yuan against the dollar and a basket of Asian currencies, making it more appealing for overseas corporates and institutions.
He further explained that historically, monetary policy and economic cycles in China and the US have diverged, unlike some other developed economies that are highly linked to the US. Rmb, in which case, has the opportunity in any portfolio to become a great risk-hedging alternative to the dollar, he said.
Last October, Egypt issued a sovereign panda bond, one that is denominated in Rmb and issued onshore in China’s Interbank Bond Market (CIBM), raising Rmb3.5 billion, becoming the first African (Middle Eastern) sovereign issuer of such facilities. Proceeds will be channelled towards digital and transportation projects domestically, according to a disclosure.
PBOC and the State Administration of Foreign Exchange (SAFE) made clear around the end of last year that proceeds raised through panda bonds are allowed to be transferred offshore, adding to the attractiveness of such financing facilities for overseas issuers.
Similarly, Nammari said, that while a number of Middle Eastern-based financial institutions are looking at Renminbi issuance, this is usually driven by high dollar funding costs and a desire to arbitrage the interest rate differential between CNH and USD. The prevailing practice is to raise funds in Rmb and then immediately swap to dollar.
“As banks don’t have any material funding requirements in the currency, they don't tend to hold on to Rmb and the practice of issuing in Rmb and immediately swapping it out remains, for the time being, one part of banks’ financial toolkit,” she added.
Linklaters’ Hong Kong-based capital markets partner Chin-Chong Liew agreed that to encourage offshore investors to use the currency as a store of value, adequate Rmb-denominated products should be developed and made available overseas.
Shariah-compliant products that better cater to the cultural environment in the Middle East region would be a good start. Cullen said there has been a growing interest from Chinese financial institutions looking to issue Islamic debt, and to offer Islamic bank financing into the Middle East.
“Middle Eastern institutions may look to raise Shariah-compliant financing in Rmb where Rmb rates are attractive. This would generally be accompanied by a cross-currency swap so that the Middle Eastern borrower is not exposed to Rmb FX risk,” he said.
Full cycle
Saxo Markets’ Wong pointed out to FA that the increasing adoption of Rmb for funding is particularly appealing for firms with substantial exposure to China, for example, those who are exposed to infrastructure investment projects which involve payments in Rmb to Chinese contractors and suppliers, for example, in the case of ACWA Power. The firm didn’t reply to FA’s emailed request for comments.
However, in the short to medium term, a more widespread use of Rmb in the Middle East will not be fully realised. Challenges, as he explained, come from a host of factors including regulatory clarity, offshore liquidity, currency stability and access to onshore capital markets.
“One key consideration is the relative shortage of offshore Rmb liquidity due to China’s capital controls, which can limit the ability to settle trade or conduct financial transactions in Rmb,” he said. China implements a stringent capital control system overseen by the SAFE, strictly limiting and monitoring cross-border fund flows.
“Restricted access for foreign entities to China’s domestic capital market also presents a hindrance,” Wong continued.
“Although China has been gradually opening its financial market, foreign investors still face limitations affecting their ability to fully engage with Rmb-denominated assets and instruments.”
Overseas investors need to join the Qualified Foreign Institutional Investor (QFII) scheme in order to directly participate in China’s onshore capital markets, or invest in mainland China through the bond and stock connect programmes with Hong Kong. The latter has been more popular among investors due to the greater connectivity and compatibility of the Hong Kong market with the rest of world.
Le Xu, lecturer at the department of strategy and policy at the National University of Singapore Business School, echoed this view. Xu said that strengthening the infrastructure of Rmb cross-border payment systems is much needed to provide both sufficient supply of the currency offshore and smoother investment channels.
Joel Tan, chief executive of Wrise Private Hong Kong, said that tapping into Chinese assets presents benefits for Middle Eastern-based investors beyond just diversification. There are investment opportunities across sectors ranging from technology, consumer goods to manufacturing, he explained, offering diversification from oil and real estate.
The private wealth management firm launched a new office in Dubai earlier this year, targeting the ultra-rich community and family offices in the Middle East region. Chinese assets are ‘considerably underweight’ in current portfolios of Middle Eastern investors, Tan said. However, the team is observing a growing trend of clients within the region exploring alternative currencies, including the yuan.
The global geopolitical landscape will remain another key factor. According to China Industrial Bank’s Lu, geopolitical tensions have made Rmb less appealing among the US and other developed western markets, while the Middle East became an ideal alternative, as the region itself tries to diversify its major industries and currency flows.
At the same time, market players in the Middle East might still prefer more stable and dominant currencies such as the US dollar and euro, given the geopolitical dynamics. Wong said that potential sanctions or trade tensions between China and other major economies could influence the willingness of Middle Eastern-based organisations to embrace the yuan. These concerns over disruptions or restrictions stemming from geopolitical conflicts could deter them from fully adopting Rmb for their operations, he added.
Some other opportunities lie ahead. The central banks of Hong Kong, mainland China, Thailand and the UAE, are founding members of the project mBridge, which seeks to explore cross-border payments using central bank digital currencies (CBDC) during international trade.
The project seeks to address the risks from the use of intermediary banks during global trade with distributed ledger technology (DLT), that offers direct and secure transaction infrastructure.
The next few years will see heightened activity between the Middle East and China, with many challenges and opportunities.
This article first appeared in FinanceAsia's 2024 Volume Two of the magazine.
