Dubai: Chinese exports to the UAE like textile products, clothes, industrial products, along with metal-based products, may become cheaper after UAE’s second-biggest trading partner devalued its currency by the most in two decades.

The Chinese central bank cut its daily reference rate by 1.9 per cent but also promised to give market forces a bigger role in setting exchange rates in future raised the possibility of further declines.

In recent months, the yuan has strengthened along with the dollar, making Chinese exports more expensive and raising the risk of politically dangerous job losses in industries that employ tens of millions of workers.

This would be good news to raise the competitiveness of Chinese goods in the international markets, who run their businesses on wafer thin margins.

“Things would be cheaper for the UAE and we should be importing more. It is a symbolic move as it saw exports suffer,” Nadi Bargouti, managing director, asset management of Emirates Investment Bank told Gulf News.

Imports from China to the UAE, its number one importer, stood at $21 billion in 2014, contributing to more than 11 per cent of the total imports.

In the first quarter of China, the bilateral trade exceeded $12.8 billion, making it well positioned as Dubai’s top trading partner. China is also the UAE’s second largest trade partner as trade volume between the two countries stood at $54.8 billion in 2014, and is growing at 16 per cent annually. With 4,200 Chinese companies registered in UAE, the Emirates are the largest Middle East market for Jaap Meijer, managing director — equity research, Arqaam Capital also agreed.

“This 2 per cent devaluation will makes imports only slightly cheaper from China for the UAE,” Meijer said, adding “The tweak comes as Chinese growth has been slowing down, stock market corrected and amid a push to have the currency accepted as a global reserve currency by IMF, which has been delayed until September next year.”

Further depreciation

But, this may not be enough for raise the competitiveness of Chinese products, even as analysts expect further depreciation of the yuan.

“The devaluation may not be seen as a one off, and we may see further depreciation of the renminbi versus the USD as the central bank shifted towards a more market-determined exchange rate,” Meijer said.

“Euro has weakened more versus the dollar, so it does not fully address the competitiveness of China versus its trading partners. The move may soften the impact of an unexpected sharp fall in China’s exports that was announced for the month of July” Meijer added.

The euro has weakened against the dollar by a fifth in the past two years.

This devaluation could result in a currency war, said Ole Hansen, head of commodity strategy at Saxo Bank.

“In general we are seeing another round of risk off today as the devaluation add to the “currency war” currently seen. The strong dollar already trading a record levels against a basket of EM currencies could potentially slow the prospect for US rate hikes,” Hansen said.