China needs to ease capital controls before the UAE can consider buying the Asian powerhouse's assets, says the Central Bank Governor.
If rules were relaxed, the treasury department of the UAE Central Bank would decide on whether to buy yuan-denominated assets, Sultan al Suwaidi said.
"It depends on the Chinese themselves because they are not yet prepared to allow the yuan to be a reserve currency, so they have tremendous controls," he said yesterday.
"If China relaxes controls, [a decision] will go to the investment committee of the treasury department of the Central Bank."
Mr al Suwaidi said the Emirates had held informal talks with China about the possibility of buying that country's assets.
Currently almost all of the Central Bank's Dh183.1 billion (US$49.85bn) of foreign currency assets is denominated in US dollars.
Hong Kong and Malaysia are among a small but growing group of countries that are starting to buy Chinese bonds and other assets as China becomes amore powerful economic player.
At the same time, political wrangling over the US budget deficit is heightening investor concerns about the long-term outlook for the dollar as the world's reserve currency.
A bill that would raise the US debt limit by $2.4 trillion failed to win approval from legislators on Tuesday. The yield on 10-year treasuries slipped close to the lowest point this year as signs of slowing growth fuelled speculation that the Federal Reserve would keep US interest rates low.
Restrictions imposed by China make buying its assets challenging. Controls over the yuan's convertibility mean it is difficult for foreign investors to freely buy yuan assets without permission from Beijing.
Asian central banks have said they see little option but to keep buying US government treasuries because of a lack of viable alternatives to the dollar.
Mr al Suwaidi said, however, he did not detect a trend in the GCC to follow suit.
"I don't think there's a strong move in the GCC countries to follow the Asian banks' investment policies," he said on the sidelines of a workshop in Abu Dhabi on financial regulations. "There are guidelines [the UAE Central Bank] put and review from time to time, therefore if there's a need to move into treasuries in a bigger way, that will be discussed and agreed."
Holding dollar assets makes sense for the UAE, bankers say, because the dirham is pegged to the dollar. The country's main export, oil, is also traded in dollars.
But China is becoming an increasingly important trade and investment partner for the UAE.
Other central banks, including most recently South Korea, have got round restrictions by registering for quotas under China's qualified foreign institutional investor programme, which allows foreign investors to buy equities and bonds on the mainland.
