African boost for China’s currency
Co-operation between countries will play role in internationalisation of the renminbi
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.