African boost for China’s cur­rency

Co-op­er­a­tion be­tween coun­tries will play role in in­ter­na­tion­al­i­sa­tion of the ren­minbi

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - KENNY CHIU

CHINA’S rise to be­come the world’s sec­ond largest econ­omy marks a real growth in strength of de­vel­op­ing coun­tries on the in­ter­na­tional po­lit­i­cal and eco­nomic stage. In ad­di­tion, since Chi­nese Premier Li Ke­qiang’s four­na­tion tour of Africa, China-Africa re­la­tions reached an un­prece­dented co­op­er­a­tive cli­max.

In the past, China-Africa co-op­er­a­tion was fo­cused on in­fra­struc­ture, con­struc­tion and min­eral re­sources ex­plo­ration. How­ever, the re­la­tion­ship be­tween the China and African coun­tries is ex­pected to strengthen into mul­ti­di­men­sional and deep in­te­gra­tion. Their fi­nan­cial co-op­er­a­tion be­tween will have an im­por­tant role in internationalising the ren­minbi, the of­fi­cial name of China’s cur­rency.

Ren­minbi in­ter­na­tion­al­i­sa­tion means the cir­cu­la­tion of ren­minbi out­side main­land China. This has be­come a popular process of pric­ing, set­tle­ment and re­serve cur­rency in the world. As early as 2007, China started ren­minbi in­ter­na­tion­al­i­sa­tion and, as China over­took Ja­pan in 2010 to be­come the world’s sec­ond largest econ­omy, in­ter­na­tion­al­i­sa­tion was boosted.

Ren­minbi in­ter­na­tion­al­i­sa­tion has be­come im­por­tant in global fi­nan­cial is­sues and has as­sisted China to:

Re­duce the cost of in­ter­na­tional trade;

Im­prove the com­mu­nica­tive power of the Chi­nese econ­omy; and

Quicken its ad­vance to­wards mid- to high-end global in­dus­tries.

Ren­minbi in­ter­na­tion­al­i­sa­tion is set to op­ti­mise the in­ter­na­tional fi­nan­cial ecol­ogy, in­crease the in­flu­ence of de­vel­op­ing coun­tries in the in­ter­na­tional fi­nance field and break fi­nan­cial dom­i­na­tion of de­vel­oped coun­tries.

While the ren­minbi is a cur­rency with sig­nif­i­cance to de­vel­op­ing coun­tries, good credit and cur­rency value will bring tan­gi­ble ben­e­fits to many de­vel­op­ing coun­tries.

Chi­nese banks will play an im­por­tant role in the process of ren­minbi in­ter­na­tion­al­i­sa­tion. Through busi­nesses such as in­ter­na­tional set­tle­ment, in­ter­na­tional bank cards and fund cus­tody, Chi­nese banks can de­velop in­ter­na­tional in­ter­me­di­ary ser­vices and share sta­ble earn­ings de­rived from rapid eco­nomic de­vel­op­ment and ren­minbi in­ter­na­tion­al­i­sa­tion.

Ren­minbi in­ter­na­tion­al­i­sa­tion will al­low Africa to ben­e­fit from:

Eco­nomic de­vel­op­ment and the in­te­gra­tion of the African fi­nan­cial mar­ket;

Re­duced trade and in­vest­ment costs be­tween China and Africa;

An op­ti­mised in­vest­ment en­vi­ron­ment; and

En­hanced eco­nomic China-Africa co-op­er­a­tion.

As cen­tral banks in Africa be­gin to ac­cept ren­minbi as a for­eign ex­change re­serve cur­rency, the ex­change rate risk is re­duced and the ef­fi­cien­cies of trad­ing ac­tiv­i­ties are im­proved.

“The set­tle­ment in ren­minbi can pro­mote the flow of ren­minbi in the in­ter­na­tional mar­ket. Nige­ria is China’s ma­jor trade part­ner in Africa, and the set­tle­ment in ren­minbi can re­duce the ex­change-cost ra­tio of en­ter­prises and im­prove ef­fi­ciency of trad­ing ac­tiv­i­ties,” said Wang Luo, deputy di­rec­tor of the Depart­ment of Asian and African Stud­ies in the Re­search In­sti­tute of the Chi­nese Com­merce Min­istry.

Chi­nese banks will be­come the main force of ren­minbi in­ter­na­tion­al­i­sa­tion in Africa. Th­ese banks have large as­sets, var­i­ous ser­vices, con­sid­er­able for­eign ex­change re­serves, a vast mar­ket and a strong fi­nan­cial in­no­va­tion abil­ity and ser­vice de­vel­op­ment level. China’s fi­nan­cial sys­tem is rel­a­tively sound, has a strong risk re­sis­tance ca­pac­ity, a more sci­en­tific fi­nan­cial sys­tem, more spe­cific credit con­struc­tion, rich and di­ver­si­fied fi­nan­cial prod­ucts, and su­pe­rior fi­nan­cial in­no­va­tion abil­ity and de­vel­op­ment.

African coun­tries and en­ter­prises should there­fore de­velop more business con­tact with Chi­nese banks.

The risks from ren­minbi ex­change rate fluc­tu­a­tion should not be ne­glected. The in­ter­na­tion­al­i­sa­tion of ren­minbi is tak­ing place in the in­ter­na­tional for­eign-ex­change mar­ket which is dom­i­nated by a strong US dol­lar. For-

Good credit and cur­rency value will bring tan­gi­ble ben­e­fits to de­vel­op­ing coun­tries

eign ex­change fluc­tu­a­tion is common and it is fore­see­able ren­minbi will most likely con­tinue to ap­pre­ci­ate within the next year. Chi­nese banks could es­tab­lish off­shore fi­nan­cial cen­tres; carry out off­shore fi­nan­cial trans­ac­tions; re­alise di­rect pay­ment of ren­minbi; and re­duce cur­rency trad­ing cost.

The Bank of China (Jo­han­nes­burg branch) has opened ac­counts and pro­cessed ren­minbi clear­ing business for 23 African banks, in­clud­ing banks in SA, and the re­serve banks of sev­eral African coun­tries. Ac­cord­ing to this branch, it is pro­cess­ing ap­pli­ca­tions from 25 African banks to pro­vide them with ren­minbi clear­ing ser­vices.

Ren­minbi in­ter­na­tion­al­i­sa­tion also af­fects China’s top lead­ers. Chi­nese Pres­i­dent Xi Jin­ping at­tended the sixth Brics Sum­mit, and one of the re­sults of this sum­mit was es­tab­lish­ing the Brics banks. The agreed ag­gre­gate amount at the sum­mit for “con­tin­gent re­serve ar­range­ment of Brics” is $100bn, and China will bear $41bn (41%) of the cost. This means that ren­minbi will play a key role in fi­nance sta­bil­i­sa­tion of Brics in fu­ture, an im­por­tant step for the cur­rency to move to­ward in­ter­na­tion­al­i­sa­tion.

Kenny Chiu is an ex­ec­u­tive and head of the China prac­tice group at ENSafrica.

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