The last time HH Sheikh Tamim bin Hamad al-Thani, Emir of the State of Qatar, visited Beijing was to watch the 2008 Olympics. On the last week’s state visit, it was Sheikh Tamim himself who claimed gold.
Chinese President Xi Jinping welcomed Qatar as a key partner of the Silk Road, a modern incarnation of the 2,000-year-old east-west trade route. As economic links between the two countries grow ever closer, Qatar won the race to become the Middle East’s first hub for clearing transactions in the Chinese Renminbi (RMB).
This is an important moment.
Qatar, which has some $43bn in net foreign currency reserves and an estimated $200bn in foreign assets in its sovereign wealth fund, is the biggest supplier of liquefied natural gas to China.
Trade with China has soared, climbing to 41.9bn Riyals ($11.5bn) in 2013 from just 1.5bn Riyals a decade ago, according to Qatar’s statistics authority. This is against the backdrop of a 50-fold increase in trade between the region and China over the past 20 years.
As ancient Silk Road trade links begin to reawaken, a new future is being defined.
Qatar companies are now able to weigh up the advantages of financing trade and investment flows in RMB, as opposed to dollars or euros. For example, paying a China-based trading partner in RMB means that suppliers do not have to bear the cost of converting Riyals to RMB.
In the longer term there is the prospect of commodities contracts, including oil and gas, being written wholly or in part in RMB.
There is no mistaking the direction of travel which Beijing wants to take: encouraging the use of the RMB for international transactions is a long-term strategy.
China overtook the US in 2013 to become the world’s largest trading nation, with its trade in goods passing the $4tn mark.
In 2010, 2.6% of import and export goods trade in China was transacted in RMB. In 2011 that proportion rose to 6.4%. Today, that figure stands at 18%.
The 35bn RMB ($5.7bn) currency swap deal signed on Monday is a milestone, helping to position the RMB as the currency of choice for the new Silk Road.
The agreement allows the Qatar central bank to supply financial institutions with RMB for use in trade settlement and is one of a handful of similar accords which China has signed with countries around the world.
In addition, China’s central bank has established a quota for Qatar’s investment into China. This means that Qatar’s institutional investors can invest up to RMB30bn into China directly, under its Renminbi Qualified Foreign Institutional Investor (RQFII) scheme.
As the world’s largest exporter of liquefied natural gas, Qatar has turned into an important global financial investor and is keen to explore new investment possibilities.
On the two-day official visit to China, the Qatar Investment Authority (QIA), one of the world’s major investors with $200bn in foreign assets, signed an agreement with China’s CITIC Group to launch a $10bn fund together that will invest in China.
This comes as the QIA expands its office in Beijing and looks for new partners as it plans to invest between $15bn and $20bn in Asia in the next five years.
In October, QIA signed an agreement allowing it to buy a $616mn stake in Lifestyle International Holdings, which is the operator of the SOGO department stores in Hong Kong and mainland China. It also has holdings in Agricultural Bank of China and Chinese e-commerce group Alibaba.
Set against this context, the RQFII agreement sends a strong signal of strategic partnership.
Qatar is only the eighth centre, out of a total of nine globally, to have been granted a much sought after quota. This puts it in the same bracket as Canada, France, Germany, Singapore and the UK.
With a $200bn economy that continues to grow faster than the global average, Qatar’s outlook is bright. At HSBC, we forecast expansion of 6% this year. Authorities are making strong progress towards building a post-oil economy, supported by infrastructure investments worth an estimated $160bn (80% of last year’s GDP) between 2014 and 2021.
Qatar’s state-of-the-art $16bn Hamad International Airport, which can accommodate up to 50mn passengers per year, is a shining example. The terminal will support the growth of Qatar Airways, one of the Gulf’s three ‘super-connector’ airlines. Its fleet of 139 aircraft fly to 145 destinations, including seven major cities in China.
Two thousand years ago, caravan tracks across deserts and mountains defined our region’s trade routes. Today, the contrails of airlines show how the Gulf connects into new patterns of global commerce. In the years to come an increasing proportion of that trade, especially between the Gulf and China, will be written in a new currency: the RMB.