Building an FX Bridge Between Asia and the Middle East

In many cases this is due to official policies to boost the use of local currencies. For instance, in October 2023 China and Saudi Arabia signed a local currency swap agreement worth RMB50 billion, or SAR26 billion (USD6.93 billion). The three year deal, which can be extended if each side agrees, will boost the use of local currencies in funding trade and investment. In June 2023 the Reserve Bank of India announced that it would be requesting banks in the UAE to settle trades with India in INR and AED.

Increased FX flows between the MENAT region and Asia are increasingly happening directly between the two regions’ currencies, such as between the AED and CNY or the SAR and KRW.

Another element to the growth in FX flows between the Middle East and Asia is the increased presence of Asian contracting companies working on Middle Eastern infrastructure projects. These contractors generate FX flows between the country where they are operating and the country where they are based. These infrastructure projects involve many Chinese and Indian contracting companies.

While many of the projects are USD-based, some of the costs and the initial capital injections are being made in Asian currencies. Similar to any other international business, in construction and infrastructure projects there can be short-term cash flow shortages, which require head office intervention. These tend to be resolved through short-term financing or cash injections from the parent, which involve foreign exchange transactions. Furthermore, those Asian companies that have established themselves in the region are also looking for ways to repatriate their sales proceeds back to their head office.

There have also been steps by the Chinese government to encourage Chinese exporters as well as those state-owned enterprises that are in commercial activity to move into renminbi invoicing. As an example, between 30% and 50% of the region’s oil production is being sold to China with a small – but growing - proportion of the trade being settled in CNY. Local banks in the Middle East therefore have CNY on deposit, which they can use to make payments to the EPC contractors in their own currency.

The economic ties between the Middle East and Asia might be long established but they are strengthening month by month on the back of increased business flows between the two regions. HSBC is well positioned to help with the increased volume of FX flows between the two regions, with local dealing capabilities in many GCC countries and across Asia Pacific. While many of the crosses go through the USD, direct crosses such as AED<>INR and SAR<>RMB are increasing in volume.