By Michelle Chen
HONG KONG, March 1 (Reuters) - After the impressive success of the offshore yuan trading in Hong Kong, China has now zeroed in on a new hub for its overseas renminbi trading - the Middle East.
The three-year dream run of the offshore yuan trade settlement plan has given Beijing confidence to look beyond the region and boost the renminbi's muscle power in a big area: oil.
Industry sources told Reuters last Thursday that the Dubai International Financial Centre (DIFC), the United Arab Emirates' financial hub, may permit transactions in Chinese yuan from this year.
"The internationalization strategy should move westward to find a supplementary region to the existing Asian region," said Cao Tong, senior vice president at CITIC Bank , adding that the oil-rich Middle East, Central Asia and Russia would be a good breakthrough.
The amount of trade settled in yuan jumped sharply to 2.08 trillion yuan ($330 billion), grabbing a 10 percent share of the total trade volume in the currency, compared with only 2 percent a year ago.
This is only going to get bigger with powerful regional blocs like ASEAN, an association of ten southeastern Asian countries, set to sign trade pacts with Beijing.
China has also signed bilateral currency swap agreements with Turkey, Malaysia, United Arab Emirates, Kazakhstan and 12 other countries since 2008 with the total amount a quarter of its total trade.
The world's second-biggest economy exports products of daily use and construction machines to Middle East and imports crude oil from the region. Crude oil is among the top three products by value in China's worldwide import list in 2011, according to China customs figures.
If part of trade is redenominated in yuan, it will not only boost the amount of yuan trade settlement, but also pump more funds into the shrinking offshore yuan pool which contracted for a second consecutive month to 576 billion yuan in January.
What is more important is that if yuan is accepted and used by these oil producing countries, it will significantly enhance the currency's status in the global currency system.
In fact, the dollar's status as a global reserve currency is to some extent also because oil contracts are priced and settled in that currency.
China has already started accelerating its opening up of capital account by allowing yuan FDI and ODI recently, together with an ambitious outline of making Shanghai a global renminbi products innovation, trading and clearing center by 2015.
The timing could not have been better as the yuan is steadily appreciating which makes it more attractive, while the main currency-issuing countries are printing notes to solve their debt woes.
WEEK IN REVIEW:
* The Renminbi Kilobar Gold has recorded satisfactory transaction volumes since its launch in October last year, according to Chinese Gold & Silver Exchange Society. Currently, daily transaction volume is at around 4,100 kilograms.
* Clifford Lee, DBS head of fixed income, expects total gross issuance of CNH bonds to reach 250 billion yuan this year, up from 189 billion last year.
The best time to issue CNH bonds will be the second half of this year when investors look to re-invest proceeds from maturing bonds. About 80 billion yuan worth of bonds and CDs will mature this year.
* Jun Ma, greater China chief economist at Deutsche Bank calls for quicker opening up of China's capital account. The bigger challenge now is not restriction over overseas direct investment or trade financing, but the barrier to enter the onshore capital market.
* More dim sum from Japan. Trading company Mitsui & Co priced its debut five-year dim sum deal at 4.25 percent, raising 500 million yuan ($ 79 million). Another Japanese firm Mitsubishi UFJ Lease & Finance also issued 300 million yuan ($ 48 million) three-year dim sum bond.
CHART OF THE WEEK:
CNH deposits extend decline: link.reuters.com/ryd86s
The amount of yuan deposits in Hong Kong banks declined for the second consecutive month in January and now stand at about 9 percent of total deposits in the former British colony. CNH outflows may have been due to the increased issuance of bonds and certificates of deposits and the launch of a FDI scheme.
YTD dim sum bond issuance:
Book runner: Proceeds (RMB mln): # of issues:
1. HSBC 7,487.0 27
2. Standard 5,338.5 11
3. Bank of China 4,400.0 2
4. Barclays Capital 2,183.0 4
5. RBS 1,558.0 3
YTD synthetic RMB bond issuance:
Book runner: Proceeds (RMB mln): # of issues:
1. Deutsche Bank 4,479.2 3
2. Citi 2,912.5 2
3. Bank of China 2,312.5 1
4. Bank of America 2,312.5 1
5. HSBC 1,248.5 2
* Thomson Reuters data as of August 4
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(Editing by Ramya Venugopal)