Media reports emerged on November 13 that China's currency the yuan (also known as the renminbi or RMB) had received support from the International Monetary Fund to join the fund's benchmark foreign exchange basket. The basket called Special Drawing Rights or SDR is a collection of reserve currencies that is estimated reviewed and weighted by the IMF once in every five years.

Including the yuan in the IMF's benchmark currency basket would accord it an official seal of approval which could eventually lead to worldwide demand worth more than $500 billion over the next few years for the yuan.

Currently the SDR consists of only four currencies - the US dollar the euro the British sterling and the Japanese yen. The weighting of the currencies was last set in 2010 with the dollar commanding a weight of 41.9 per cent. The euro has the second-highest weightage at 37.4 per cent with the sterling and the yen trailing at 11.3 per cent and 9.4 per cent respectively. In a statement released on November 13 IMF Managing Director Christine Lagarde declared that the yuan met the requirements for it to be a "freely usable" currency and that a final decision on the inclusion of the yuan into the SDR basket would be taken at an IMF board meeting set on November 30.

The yuan's potential inclusion into the SDR basket has some important ramifications. Just like a nation's central bank is the lender of last resort for its commercial banks the IMF is a lender of last resort for its member countries. In other words the SDR is a reserve fund that functions as an emergency reserve to supplement the forex reserves of member countries. The IMF's member nations are allotted SDRs and can borrow against them during a liquidity crisis. Of late many central banks have been facing a difficult choice of whether to constitute more of their forex coffers in US dollars or gold with the concomitant diminishing of the euro's attractiveness. If the yuan is included into the SDR it would mean that central banks will have an additional option to diversify their forex reserves.

China's yuan recently overtook Japan's yen to become the fourth most-utilised currency for worldwide payments with its share of global payments rising to a record 2.79 per cent versus the yen's 2.76 per cent for the month of August. Analysts claimed that the development boosted the yuan's claim for reserve status.

Moreover allowing some flexibility for the yuan to float in August 2015 may signify that China is looking to relax its tight hold on the economy marking a transitional step with respect to further integration into the international free markets. Eventually the yuan could come to be utilised more widely in international trade transactions and borrowings if its inclusion into the SDR is carried out. This will likely have trade implications for GCC member countries; China sources about a third of its global energy requirements from members of the GCC.

The Gulf Petrochemicals and Chemicals Association revealed in November that the bloc's petrochemical exports to China was valued at $15.15 billion in 2014 with volumes and revenues both increasing by five per cent year-onyear. GCC-China trade which stood at around $92 billion in 2010 reached $172 billion in 2014 a compound annual growth rate of about 17 per cent. GCC exports to China have grown from $56.5 billion in 2010 to $108 billion in 2014 (a CAGR of about 18 per cent). Meanwhile imports by the GCC from China have increased from $36 billion in 2010 to $64.1 billion in 2014 (a CAGR of about 15 per cent). A GCC-China free trade agreement is also under negotiation.

According to a 2014 report by the Economist Intelligence Unit the largest share of GCC exports will be directed towards China valued at $160 billion. Also China is likely to be GCC's largest import source with goods valued at $135 billion expected to come from China into the GCC by 2020. This would imply a doubling in value in comparison with the 2013 level.

The UAE individually also enjoys a thriving trade relationship with China. Total UAE-China trade is expected to reach $60 billion in 2015 according to the China-Arab States Cooperation Forum.

It is notable that in 2014 China overtook India to achieve the status as Dubai's largest trading partner with bilateral trade between Dubai and China amounting to around $48 billion (Dh175 billion). The volume reflected a year-on-year increase of around 29 per cent.

If the yuan is accepted into the SDR it would signify the start of China's fuller and more intensive integration into the global financial markets. This will have significant implications for the GCC given the fact that many of its members have ambitions to become dominant financial centres.

The inclusion of the yuan would also mean that over the short term demand for it would likely shoot up pushing the value of the currency upward. This would mean better currency arbitrage returns in terms of revenues earned from exporting to China. Conversely imports from China would become more expensive. Thus those GCC countries that maintain a healthy positive trade balance with China will likely benefit more. Currently in the GCC only the UAE and Bahrain display a negative balance of trade with China.

The yuan's entry into the SDR basket may receive a fillip from China's apparent recent attempts to internationalise its currency. On October 08 2015 China's Cross-border International Payments System or CIPS was launched in Shanghai as part of its first phase. This new clearing system predicated on the yuan is expected to lower transaction fees for those attempting yuan capital inflows into China. Though currently the CIPS is limited to only certain regions (Asia and Europe) and does not yet allow foreign direct investments and securities transactions it could eventually allow China to build an international financial hub rivalling that of New York and London. GCC countries may then have to price their growing trade with China in the yuan.

The writer is senior vice-president for research at Markaz. Views expressed are his own and do not reflect the newspaper's policy.