JEDDAH, 26 July 2005 — After China dropped its policy of linking its currency to the US dollar and adopting a more flexible system based on a basket of foreign currencies and raised the value of the yuan, economic experts are expecting a rise in the price of Chinese exports. This will result in a change in the trade balance between China and the countries it exports to. Analysts in Saudi Arabia do not expect an immediate effect on trade in the short term but there might be changes in the long term depending on future monetary policies followed by China and Saudi Arabia.
“China’s floating of its currency reflects the strength of their economy and a sound future policy,” said Dr. Nahed Taher, senior economist at the National Commercial Bank.
“This will influence its currency to appreciate in the future vis-a-vis the US dollar. The Saudi currency is pegged to the dollar and our imports from China have increased in the past years from two to nine percent of total imports and it is expected to rise. I think this floating policy will have an effect because the purchasing power of the riyal will be less in the future if it continues to be tied to the dollar. China is though expected to increase its trade with Saudi Arabia especially in the oil sector,” she said.
While some economists do not see the need for Saudi Arabia to unpeg its currency from the dollar because it relies on one product for its revenue — oil which is valued in dollars — Dr. Taher thinks that the Saudi Arabia Monetary Agency (SAMA) should consider revising their policy to a managed float. “SAMA or the decision-makers should revise their policy to reduce the impact of the inflation of other trade partners’ currencies on our economy and the utilization of oil wealth,” she explained. With a basket of currencies based on the main three trade partners, this will reduce the cost on government to support the riyal by depleting our international currency reserve and cushioning the riyal as when happened in 1997 and 1998, according to Taher.
As for the effect on businesses importing from China, Taher finds that with the expected increase in the prices of Chinese exports the Saudi businesses will lose their competitive advantage and will affect their profit margin. However, she also finds that there is a trend of increasing trade and business relations with the Far East in general, and China is looking to diversify its export market while Saudis are focusing on mergers and partners. “I expect that the whole economic structure in the long term will change and the dollar will not be the main vehicle currency,” she said.
Omar Bahlaiwa, secretary-general of the Saudi Committee for the Development of International Trade at the Council of Saudi Chambers, does not expect the Chinese decision to float its currency will affect trade relations between the two countries. “It all depends on the principle of supply and demand. If it continues to provide competitive products with a low price and high quality, the demand for Chinese products will continue,” he said.
“China is a strategic partner. Trade exchange between the two countries increased from $30 million to $10 billion during the past years. We have important products for China, oil and petrochemical products, and China exports to us different consumer products. We have more than one choice in importing consumer products but China is limited in its choices for importing oil. So I don’t think that in the short term there will be an effect on trade relations,” added Bahlaiwa. He said that there are many joint projects in the two countries and our market is the largest in the region for consumer products. China is investing in the oil sector here so cooperation will continue with China as strategic partner.
After China made its announcement of floating its currency, Malaysia also announced floating its currency. “Malaysia cannot compete with China so it adopted a strategy of ‘China plus one’. This is a wise decision because Malaysia made a strategic alliance with China,” said Dr. Taher. She does not expect to see any change in trade relations between Saudi Arabia and Malaysia especially in the finance sector, Malaysia is a pioneer in Islamic Sukuk or bonds, and it needs the Saudi customer.
