Yuan gains favour over dollar for commerce across the Gulf

The US dollar's weakness against the Chinese currency is heaping pressure on Gulf manufacturers importing from China.

China's currency has risen 5 per cent against the US dollar in less than a year. EPA

Manufacturers across the Gulf have started to abandon the dollar as a means of paying for Chinese raw materials, a sign of the weakening of the US currency's grip on international trade.

China's currency has risen 5 per cent against the US dollar in less than a year, and as its global profile increases more importers are paying for goods with the yuan.

"A weaker dollar means I have to pay more to import, and my profit margins come under pressure," said Chandra Krishnamoorthy, the director of Royal Palace Furniture, a manufacturer and retailer in Ajmanthat operates 20 showrooms across the country. It imports 90 per cent of its furniture and other materials from China.

For the past two months, the company has been using the yuan to pay for up to 40 per cent of its imports as a hedge against the risk of future exchange rate fluctuations, Mr Krishnamoorthy said.

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Gulf economies are vulnerable to the impact of a low dollar against other currencies because their currencies are pegged to the greenback. The dollar's difficulties this year have been blamed on low interest rates and quantitative easing in the US.

China's currency has risen since last June when Beijing effectively ended its peg to the dollar and pledged to make the yuan more flexible. Timothy Geithner, the US Treasury secretary, this week made a fresh call for the yuan's appreciation to be accelerated amid US concerns the currency was being kept low to give China an unfair edge in global trade.

Further rises in the yuan against the dollar are likely to hit Gulf importers even more. The dollar's weakness was a pressing concern for many Saudi Arabian manufacturers, said Motashar al Murshed, a businessman and member of the Riyadh Chamber of Commerce and Industry.

"Saudi Arabia is a net importer, and any drop in dollar exchange rates will affect our import prices," he said. "Basic food products are more expensive than six months ago, and the more weak the dollar, the more we feel inflation pressures in Saudi Arabia."

Inflation in Saudi Arabia stood at 4.7 per cent in March. Regional currencies needed to be revalued against the dollar to safeguard oil revenues, Mr al Murshed said.

Although a de-pegging from the dollar is unlikely in the short term, the yuan's importance in the region is increasing.

Traders in the Middle East and North Africa expect the yuan to become one of their top-three trade settlement currencies this year after the dollar and the euro.

According to HSBC's latest Trade Confidence Index, a survey of small and medium-sized businesses engaged in cross-border trade, as many as 13 per cent of respondents from the region said they would use the yuan to settle trade deals in the next six months.

That information comes against a backdrop of the yuan's rising status as an international currency.

By 2015, business valued at about $2 trillion (Dh7.34tn) - more than half of China's trade - will be settled in the yuan, HSBC forecasts. At the same time, China's trade is expected to swell to one sixth of the global total.