In a groundbreaking move, China, the world’s second largest economy, and Japan, the third largest economy, have agreed to use China’s currency yuan in their foreign trade, moving away from using the US dollar.

The agreement between Asia’s two largest economies aims to broaden the use the global use of the renminbi, as the yuan is officially termed, and to see more countries move away from relying on dollars as a dominant currency in international trade.

A similar move was earlier considered by China and India, Asia’s third-largest economy. The moves are seen as extremely important developments on financial and trade dealings, which come in light of a deepening financial crisis in the West.

Asian economies are not quite far from crises hitting the world where both the Chinese and Indians have witnessed a slowdown, While the Indian rupee declined to become the worst-performing Asian currency. However, the Asian economies are still strong enough to absorb some shocks, a fact that is evident from China-Japan currency agreement in their efforts to cope with global changes resulting from the repercussions of the global financial crisis.

Due to the size and significance of China and Japan, the decision to use the Chinese currency in trade exchanges will have long-term effects. First, the Chinese economic relations will grow significantly, as well as the use of its currency, which is gaining further importance in commercial and financial transactions. China’s currency is expected to become one of the most important global currencies.

This shift forms a special importance to the countries of the Gulf Cooperation Council (GCC) for many reasons, most notably China’s weight in GCC’s foreign trade.

Over the past five years, China has topped in UAE’s non-oil foreign trade, which rose to 10 per cent annually to about Dh110 billion in 2011. China also occupies leading positions in GCC’s foreign trade.

According to Shaikh Abdullah Bin Zayed Al Nahyan, UAE Foreign Minister, trade between the GCC countries and China has increased tenfold last year to reach $100 billion (Dh367.8 billion). He expects that GCC-China trade will continue to increase in the current decade.

Furthermore, China is turning to become the most important importer of Gulf oil, exceeding Western Europe and the US which are trying to reduce their dependence on energy sources from the Arabian Gulf, both through the development of alternative energy sources, as is the case in Europe or through discoveries of new sources of hydrocarbons along with sources of renewable energy sources, as is the case in the US.

In view of this growing importance of economic relations between the GCC and China, it is difficult for these relations to grow further in light of the complete dependence on the US currency in their trade and financial relations, which requires raising the issue of the use of the Chinese currency in GCC’s trade dealings with China.

And if this happens, both sides will achieve significant financial gains, including the possibility of taking advantage of the low value of Chinese currency and cutting the costs of transactions levied by US financial and banking institutions which are calculated in the US dollar.

Although oil sales to China will continue to be charged in the US dollar, which is still the dominant currency in global oil markets, but the non-oil trade between the two sides can take place in other currencies, particularly the Chinese currency.

This forms approaches for the future and keeps up with economic, trade and financial changes in the world, especially that China’s economy is expected to be ranked first globally over the next three decades, and it may increase further dependent on the GCC countries in meeting China’s needs of energy, petrochemical products and petroleum products, at a time of GCC imports will increase from Chinese products.

Apart from China, the same method can be also followed with other emerging global currencies, including the Indian rupee, whereas India ranked second in the foreign trade of the GCC countries, not to mention the possibility of adopting a single Gulf currency in trade and international financial ties.

This requires an integrated link between monetary policies and financial and commercial exchanges between the GCC countries and major economic blocs and countries, thus leading to diversity and reducing risks and costs, as well as increasing efficiency and gains in the relation between the GCC countries and their main partners in the world.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.