Continent is fast moving to adopt China’s currency

Sino-Africa forum promotes Chinese money as a stable option for the region as part of the exchange medium’s globalisation

CHINA unveiled its new Africa strategy during the Johannesburg summit of the Forum on China-Africa Cooperation on December 4, where Chinese President Xi Jinping announced a R900bn Africa-bound investment plan for the next three years in his opening speech to the African heads of state.

Last year at the African Union summit, Chinese Premier Li Keqiang set the target for bilateral trade volume to top R6-trillion by 2020.

Li Feng, the executive vicepresident of the Bank of China’s Johannesburg branch, is confident that China’s engagement with Africa will further enhance the usage of the Chinese currency renminbi on the continent.

“On the one hand, redenomination of cross-border trade in renminbi can reduce the transaction costs by minimising exchange rate risks; on the other hand, the Sino-Africa economic tie has grown from trade to investment, which will generate more demand for financial services, creating more opportunities for renminbi in Africa,” said Li Feng. The internationalisation of renminbi would expand beyond Asia and Europe and to Africa, he added.

According to Bank of China, in the first 10 months of this year, the renminbi trade settlement and investment amount in and out of Africa has grown 35% to 126.6-billion yuan (R312bn). Half the amount is facilitated by the Bank of China’s Johannesburg branch, which was authorised in July this year by China’s central bank, the People’s Bank of China, to serve as the first clearing bank in Africa for renminbi business.

However, compared to the total amount of pan-China crossborder renminbi trade settlement and investment amount, the usage of renminbi in Africa is still in the initial stage. According to data released by the People’s Bank of China, in the first threequarters of this year the pan-China cross-border trade settlement in renminbi has reached cumulatively 5.46-trillion yuan (R11trillion), and direct investment in renminbi 1.56-trillion, a total of 7.02-trillion yuan.

On the announcement of the US Fed’s consideration of withdrawal from its quantitative easing scheme, African currencies have depreciated dramatically. The rand this month is half of its value in 2011 against the US dollar. Therefore, choosing the Chinese currency can avoid exchange rate loss risks.

Yao Xiaomin, head of trade finance and renminbi business marketing at the Johannesburg branch, says the use of renminbi will give African enterprises more leverage when negotiating price with their Chinese business partners or partners from the Asia-Pacific region where renminbi is widely accepted.

Li oversaw a 2.7-billion yuan (R6.08bn) transaction on November 30 for a Mauritian client — the bank’s biggest single clearing deal in Africa. “We wouldn’t have even imagined a transaction in renminbi this big last year and because of the PBoC’s (People’s Bank of China’s) authorisation we expect to do more,” says Li.

At the moment, the Johannesburg branch’s renminbi service has reached more than 30 African countries, and opened 69 renminbi clearing accounts for financial institutions in Africa.

African nations are in strong demand for relatively stable currencies and the expected appreciation of renminbi in the long term could meet these needs.

Since 2013, six African nations — SA, Nigeria, Kenya, Ghana, Angola and Tanzania — have publicly announced their holdings of renminbi through currency swap agreement, purchasing renminbi denominated bonds and other methods.

In April this year, the South African Reserve Bank signed a three-year bilateral swap agreement with the People’s Bank of China for the exchange of local currencies of up to 30-billion yuan.

The Bank said in a statement that the purpose of the agreement was to support trade and investment between SA and China, and to act as a mitigating resource for short-term balance of payment pressures.

Li says the South African Reserve Bank and the Namibian central bank have each opened renminbi accounts with the Johannesburg branch.

“The main reason African central banks include renminbi in their foreign reserves is that the Chinese currency has a higher interest rate than the other reserve currencies,” says Li, adding that African central banks invest their renminbi mainly in Hong Kong and the Chinese interbank bond market.

Li expects more African countries to add renminbi to their foreign reserves following the granting of the reserve currency status by the International Monetary Fund. The reserve currency is commonly used in international transactions and often considered a hard currency or safe-haven currency.

Yi Huiman, governor of the Industrial and Commercial Bank of China, which owns 20% of Standard Bank, sketched the renminbi expansion plan in Africa during the Forum on ChinaAfrica Cooperation summit.

“The first step is to secure more supports for the usage of renminbi from both the African and the Chinese side of the governments. The second step is then to facilitate the development of renminbi infrastructure and other related infrastructure. The third step is to provide the market with more renminbirelated financial products to invest in,” he said.

The main reason African central banks include renminbi in their foreign reserves is that the currency has a higher interest rate