Barriers to investment have already stalled attempts by the UAE Central Bank to activate a US$5.5 billion currency swap agreement between the two nations, signed nearly two years ago.
China reforms provide hope for UAE investors
Investors in the UAE are hoping planned reforms to the Chinese economy will help to gradually ease barriers to investment.
Such obstacles have already stalled attempts by the UAE Central Bank to activate a US$5.5 billion currency swap agreement between the two nations, signed nearly two years ago.
In a sign that shackles on the world’s second largest economy may be slowly removed in the coming years, the ruling Communist party last week delivered a blueprint for reform. It promised to give the market a “decisive” role in steering the market. The communiqué also urged fewer investment restrictions.
“Part of the liberalisation reforms include the gradual opening of Chinese markets which will give more opportunities to retail investors to tap Chinese growth,” said Francisco Quintana, the chief economist of Asiya Investments, a Kuwait-based investment firm. “Also, the gradual liberalisation of the currency will be on the agenda.”
Still, he said it would likely take some time for reforms to materialise, given that the blueprint was a 10-year policy framework.
The wording of the document was keenly awaited by investors as a window into the future policy direction under the president Xi Jinping. The communiqué disappointed some observers because of its vague wording, while further details of the plans are expected to be released this week.
But analysts say the reform pledges signalled a recognition by officials that in the longer term China will have to open up more to foreign investors to help develop its financial markets and prop up slowing economic growth.
Until now, Hong Kong, Singapore and London have been among the few places outside mainland China to benefit from an easing of controls in China’s financial system. In the latest development, all three signed deals with China in recent weeks to enable easier investment in the country’s domestic markets.
But the UAE is trying to position itself to benefit from the next wave of reform.
Until now, the most meaningful step towards enhancing trade and investment ties between the two countries appeared to be the currency swap deal signed in January last year. China has signed a string of similar deals with other nations in recent years as a way of bolstering trade and supporting the international use of the yuan.
But the UAE Central Bank said last week that it was still waiting for approval from its Chinese counterpart to activate the deal.
“The MOU [memorandum of understanding] has been signed and to activate it an account has to be opened with the Central Bank of the UAE and the other country,” said Saif Al Shamsi, the assistant governor of monetary policy and financial stability at the UAE Central Bank. “There is communication between the two parties to activate the opening of the account but we are still in the same area.”
Another sign that China’s reform efforts are likely to be gradual emerged with the release of official data last month showing aggressive intervention in currency trading in recent months by the People’s Bank of China.
Analysts say the move reflects a concern by authorities that the yuan does not rise too fast. It has gained 2.4 per cent against the dollar so far this year, even as currencies of other emerging economies such as Indonesia and Brazil have been sold off.
Philippe Ghanem, the managing director and vice chairman of ADS Securities, an Abu Dhabi-based foreign exchange brokerage, said last week’s reform agenda was likely to be supportive of the yuan.
“A lot of political decisions are based on what’s happening in markets,” he said. “It is likely to mean the renminbi [the yuan’s other name] will gain power.”
The company started trading in yuan last month in response to growing interest in the currency.
But others are more sceptical about the scale and pace of reform efforts.
“The Communist party has an incentive not to internationalise the renminbi,” said Bessma Momani, the associate professor in political science at the University of Waterloo in Canada. “It’s very afraid what it will do to inflation in the interior of the country, which poses deep political concerns to the governing system.”