RMB settlement is heating up in Middle East countries

Recently, the Central Bank of Iraq announced the latest measures to improve foreign exchange reserves, including allowing the direct settlement of the country's trade with China in RMB. This move has once again aroused the enthusiasm of Middle East countries for RMB settlement.

Two ways to achieve

The Central Bank of Iraq issued a statement on February 22 that the direct settlement of trade with China in RMB will be achieved through two ways: first, increase the RMB reserves through the RMB accounts opened by the banks of the country in China; The second is to increase the US dollar reserves of the Bank of Iraq through its accounts at JPMorgan Chase and DBS Bank of Singapore to exchange for RMB.

The economic adviser of the Iraqi government, Mudir Saleh, said that this would be the first time that Iraq allowed the settlement of import trade from China in RMB. Previously, the country's trade with China had been settled in USD. Saleh also said that the new measures of the Central Bank of Iraq are applicable to the import trade of the private sector, excluding the oil trade.

Amar Ibrahimi, an official of the Supreme Audit Committee of Iraq, said that the measures announced by the Central Bank of Iraq this time showed the increasing importance of the RMB in the international market. These measures will make the trade between Iraq and China more convenient.

China is Iraq's largest trading partner, and Iraq is China's third largest trading partner among Arab countries. According to the data of the Ministry of Commerce of the People's Republic of China, the bilateral trade volume between China and Iraq in 2021 was 37.3 billion US dollars, up 23.4% year on year, of which China's exports were 10.69 billion US dollars, down 2.1% year on year, and imports were 26.61 billion US dollars, up 37.8% year on year.

The website of "Arab Businessmen" said on the 23rd that the new measures of the Central Bank of Iraq aimed at stabilizing the Iraqi dinar, which had depreciated against the Hoa Kỳ dollar in recent months, were part of the measures to obtain foreign exchange. According to a number of media reports, Iraq is currently facing a shortage of dollars, partly because the Federal Reserve has increased restrictions aimed at preventing the transfer of dollars from Iraq to neighboring Iran, which is subject to United States sanctions. The shortage of funds led to the decline of the exchange rate of the Iraqi dinar street currency against the United States dollar. In response, the Central Bank of Iraq adjusted the official exchange rate earlier this month.

Mahajub, a researcher at the Arab Research Center, said that Iraq is another Middle East country that settles trade with China in RMB, which shows that the international status and influence of the RMB have been further strengthened, and that the process of the RMB going global and realizing internationalization has taken another important step.

However, some analysts believe that Iraq's imports from China are relatively small, so settlement in RMB cannot have a significant impact on the overall degree of RMB internationalization, and larger economies need to participate.

Middle East countries welcome RMB

The decision of the Central Bank of Iraq further shows that some Middle East countries are moving away from the dollar. For example, Ả Rập Saudi's Finance Minister Mohammed Jadan said at the 2023 Davos Forum that Saudi Arabia is willing to trade oil in non-US dollar currencies.

it happens that there is a similar case. Since September 2022, the Iranian real has depreciated by nearly 45%. The exchange rate of the real against the US dollar fell to a record low on February 25th - the US dollar against 575000 real. As the annual inflation rate exceeds 50%, Iranians have been trying to prevent the depreciation of savings by purchasing foreign exchange or gold. In order to cool the market and ease the demand for dollars, the Iranian Central Bank lifted the ban on private currency exchange points selling hard currency on the same day. In addition, Iran has opened a foreign exchange exchange center to allow ordinary Iranians to purchase foreign exchange.

In 2018, then President Trump of the United States restarted the sanctions against Iran, limiting Tehran's oil export and foreign exchange acquisition, which harmed Iran's economy. Since September last year, the nuclear negotiations between Iran and the world's major powers aimed at containing Tehran's nuclear program in exchange for lifting sanctions have reached an impasse, worsening Iran's future economic expectations.

As a response, in addition to announcing the change of the country's new currency and launching the transitional version of the country's new currency a few weeks ago, the Iranian authorities also listed the RMB and the euro as the country's main foreign exchange currencies to replace the US dollar.

Considering the huge space for trade and trade cooperation between Iranian entities and Chinese enterprises, and the development of digital RMB into the world's leading digital currency, according to the latest data of Iran Financial Forum, the share of RMB in Iran's foreign reserves has exceeded 22% as of December last year. The analysis shows that the settlement currency for China's purchase of Iranian oil is mostly RMB or Euro.

At present, China has extended the trading time of onshore RMB since January this year, strengthened the prospect of using RMB in transactions between China and energy exporting countries and commodity suppliers, and encouraged global traders to use RMB in commodity transactions, including oil and gold. Obviously, this will increase the pricing power and use of RMB in the commodity market.

At the same time, China is also actively developing its own SWIFT alternative payment system, the RMB Cross-Border Payment System (CIPS). So far, the actual business scope has extended to more than 140 countries. In addition, the international market share of RMB crude oil futures trading has reached 14%. These factors will help find a new direction for international oil trading in countries including Iran after the break with the US dollar. It is expected that the day when oil transactions in Iran, Saudi Arabia and other countries will be settled in RMB on a large scale is approaching.