China's move to a more flexible currency is expected to boost UAE exports by making goods produced in the Emirates much cheaper for Chinese consumers. The US has pressured China for months to allow the yuan to strengthen against the dollar. China has kept its currency pegged to the dollar since the middle of 2008 to keep its export-driven economy humming.
But the Chinese central bank said on Saturday it would increase the flexibility of the exchange rate, signalling an end to almost two years of a fixed dollar peg. Given the dirham's peg to the dollar "this could encourage exports from the UAE and GCC but it depends on how China's currency moves", said Giyas Gokkent, the chief economist at the National Bank of Abu Dhabi. China is one of the largest destinations for exports from the UAE, about two thirds of which are related to oil. But a stronger yuan against the dollar is not all beneficial for the UAE, as it may raise the price of imports from China.
China was the second-largest supplier of imports to the country last year, with US$13.1 billion (Dh48.11bn) of goods and services. The announcement made before next weekend's Toronto summit of the Group of 20 leading and emerging economies may help deflect criticism, led by the US President Barack Obama, that the country has relied on an undervalued currency to promote its cheap exports. Some US politicians had been arguing for legislation enabling the government to impose levies on countries with exchange rates deemed too low.
By keeping the yuan artificially cheap against the dollar, China ensured its imports were attractive for US consumers and US exports to China were more expensive. China's policy has led to a huge surplus in its trade with the US, which critics claim is threatening American jobs. "China is acting reluctantly," said Mr Gokkent. "If you look at China's trade surplus, two thirds is with the US so China will be careful not to see its currency gain significant value against the dollar."
Mr Obama said China's decision represented a "constructive step" and could "help safeguard the recovery and contribute to a more balanced global economy". Attention is now likely to turn to how China's future currency regime will be managed. The central bank statement seemed to rule out any possibility of a one-off revaluation or significant yuan appreciation. It said it would keep the currency's 0.5 per cent daily trading band unchanged.
"People will be thinking about what kind of currency regime China will adopt," said Tim Fox, the chief economist of Emirates NBD. "If they move towards a basket of currencies then the euro would likely be included." The Chinese central bank said that a gradual recovery in the global economy and a greater solidity in China's economic resurgence meant a more flexible exchange rate was now possible. The World Bank said last week that a less stringent currency regime would give China more flexibility over monetary policy while countering inflationary pressures by reducing the cost of imports.
The country's inflation rate increased to 3.1 per cent last month, the highest in 19 months. @Email:tarnold@thenational.ae
