Changing trading patterns and pressure to improve profit margins will boost the Gulf's use of the Chinese yuan in coming years, the head of banking giant HSBC's China operations said on Monday.
Gulf Arab countries have lagged many other parts of Asia in using the yuan because their oil exports to China are denominated in U.S. dollars and most of their currencies are pegged to the dollar.
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HSBC estimates 10 percent of China's international trade is conducted in yuan, a ratio which it expects will rise to 30 percent by 2015. The share is under 4 percent for Chinese trade with the United Arab Emirates, which imports many goods for on-shipment to other countries in the Gulf.
But Helen Wong, chief executive of HSBC China, said she was seeing growing interest within China in using the yuan instead of the dollar for non-oil trade with the Gulf.
A wider range of smaller Chinese companies are becoming involved with the Gulf, and in contrast to big state-owned firms which are accustomed to processing dollars, the smaller firms want to use the yuan to minimize costs and currency risk, she said.
"Customers are telling us that they are willing to give discounts if the payment is in RMB," Wong said in an interview while visiting Dubai to promote HSBC's yuan services to local businessmen.
Rising Chinese labor costs are also increasing interest in the yuan by compressing profit margins, making savings gained through the currency's use more important, HSBC officials said.
The bank said on Monday it was launching yuan account services in Qatar, Bahrain, Kuwait and Lebanon, allowing clients in those countries to settle cross-border trades and make term deposits in the currency. It was already offering the accounts in the UAE and Saudi Arabia.
Annual trade between China and the UAE has expanded sixteen fold since 2002 to $40.4 billion, according to Chinese official data.
Last year there were initial signs that the Gulf's interest in the yuan was moving beyond trade to fund-raising and investment; in March 2012 Emirates NBD , Dubai's biggest bank, issued the first yuan bond from the region.
Wong predicted an increasing flow of "dim sum bonds" in coming years, and said Dubai had the potential in the long term to become the Middle East's center for yuan business.
One step was taken in January last year when the central banks of China and the United Arab Emirates signed an agreement allowing them to swap 35 billion yuan ($5.6 billion). The swap facility does not appear to have been used so far, bankers said, but will ensure liquidity if demand for the yuan rises.
A key step would be any decision by China to appoint banks to clear yuan trades in Dubai, as it has done for Taiwan and Singapore in the last few months.
"Certainly the Middle East is a big enough region for it to operate its own clearing center," Wong said. But she added this would depend on factors such as the stance of UAE authorities and competition from London, a top global foreign exchange center, and there was no sign of this status being accorded now.
Even without clearing status, however, other innovations may spur yuan trade in Dubai. The Chinese central bank has said it will launch this year or next the China International Payment System, a facility to make yuan clearance more efficient for centers which lack their own clearing banks.
The new system would link Chinese and overseas banks, remaining open for most of the global day.
"We see great potential for further growth" in use of the yuan in the UAE, Zheng Yang, a senior official in the Chinese central bank's Shanghai branch, told HSBC clients in a presentation on Monday. He was visiting the UAE for talks with officials and bankers.
(Reporting by Andrew Torchia; Editing by Ruth Pitchford)