Devaluation of yuan sparks hopes for UAE’s economic growth

Chinese goods will become a little cheaper for UAE consumers after the People’s Bank of China devalued the yuan by the largest single-day percentage in two decades.

Beijing depreciated the yuan by 1.9 per cent before the start of trading on Tuesday, in what it said was a one-off move to keep the yuan stable at a “reasonable” exchange rate.

Analysts said the move should boost the country’s flagging economy.

Economists said the devaluation could ease inflation in the UAE as Chinese import prices fall, and would be good news for trading and logistics companies in Dubai.

“The fall in the yuan could, in principle, provide a boost to UAE imports of now cheaper Chinese goods,” said Daniel Kaye, Oxford Economics’ lead economist for the Middle East.

“This would benefit firms that work in the trading sector, including suppliers and re-export companies. Ultimately, cheaper prices could also be passed on to local businesses and consumers.”

China is Dubai’s biggest trading partner, with a bilateral exchange of Dh175 billion of non-oil goods and services last year. About 80 per cent of that involved imported textiles, clothes, machinery and products made from gold, silver, copper and iron, according to the UAE government.

But the economic impact of the yuan’s devaluation on the UAE depends on how the devaluation affects commodity prices – including oil prices – and regional economic growth.

“A weaker regional economy would imply reduced trade and cross-border capital flows, which could affect the UAE, given Dubai’s status as a regional business hub,” said Mr Kaye.

China, the world’s fastest-growing economy, has powered global growth for close to a decade as the ruling Communist Party sought to lift the country’s population of 1.3 billion out of poverty. Over the past decade, China’s economy has grown at an average pace of 9 per cent a year.

But China’s rapid growth might be coming to an end, given the recent Chinese stock market rout, slowdowns in a host of informal economic indicators, and official data showing that the economy grew at a six-year low of just 7 per cent in the first half of the year.

Cement production, power generation, steel output and car sales have all been slowing, indicating that Chinese demand for manufactured and intermediate goods is falling. That is evidence a broader slowdown in the Chinese economy is likely, economists say.

The currency devaluation aims to rekindle Chinese growth by spurring exports, which could prove positive for the UAE if it helps to encourage regional economic growth.

“The devaluation of the yuan will hopefully boost economic growth,” said Anita Yadav, the head of fixed income at Emirates NBD.

“China is an export-led economy. If its exports become cheaper, Chinese companies will get more cash. And if the Chinese economy gets support, that’s mildly positive for the UAE economy.”

Higher Chinese growth could also lift global oil prices, which have fallen by about half since the middle of last year. That could boost the UAE’s economic fortunes. Declining oil prices have hit the UAE government’s energy revenues as well as spending in the non-oil economy.

“If the Chinese authorities are successful in reinvigorating the Chinese economy, this would support global oil demand, boost oil prices and – ultimately – lift the value of the UAE’s oil revenues in the longer term,” said Mr Kaye. “But, needless to say, any currency-driven impact will be just one of many factors [affecting the oil price].”

However, Ms Yadav warned that the impact on the UAE’s economic growth was likely to be limited. “China doesn’t make it into the top five sources of investment into the UAE, or even its top five source markets for tourists,” she said. “But it is rapidly increasing its presence in both segments.”

Although most emerging financial markets fell on the news of the yuan’s devaluation, UAE share markets were little moved. The Dubai Financial Market General Index rose 0.11 per cent, while the Abu Dhabi Securities Market General Index closed down 0.15 per cent.

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Adam Bouyamourn

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