Chi­nese cur­rency en­ters African mar­kets

Could it be the next global re­serve cur­rency?

Africa Renewal - - Front Page - By Ton­der­ayi Muk­eredzi

In March this year Zim­babwe joined a grow­ing list of coun­tries in Africa and the world us­ing the Chi­nese cur­rency, yuan, also known as rem­nibi ( RMB), as one of its of­fi­cial cur­ren­cies af­ter its cen­tral bank added the RMB, the Ja­panese yen, the Aus­tralia dol­lar and the In­dian ru­pee to the ex­ist­ing bas­ket of cur­ren­cies.

Zim­babwe aban­doned its cur­rency in 2009 when it was ren­dered worth­less by ex­ces­sive in­fla­tion. Since then, it has been us­ing a bas­ket of cur­ren­cies dom­i­nated by the US dol­lar. In an­nounc­ing the de­ci­sion to adopt the yuan and other cur­ren­cies, the then Re­serve Bank of Zim­babwe act­ing gover­nor, Char­ity Dh­li­wayo, said that the south­ern African coun­try’s trade and in­vest­ment with China, In­dia, Ja­pan and Aus­tralia “had grown ap­pre­cia­bly.”

China is Zim­babwe’s third largest trad­ing part­ner af­ter South Africa and the Euro­pean Union, and un­til re­cently was the big­gest buyer of its to­bacco. In 2013, trade between China and Zim­babwe amounted to $1.1 bil­lion.

Gift Mugano, a trade ex­pert and ex­ec­u­tive direc­tor at the Nel­son Man­dela Metropoli­tan Univer­sity’s Africa Economic Devel­op­ment Strate­gies, told Africa Re­newal that the ad­di­tion of the RMB to the bas­ket of cur­ren­cies would only con­sol­i­date Zim­babwe’s bi­lat­eral re­la­tions with China rather than boost trade, and help China’s quest to make its cur­rency pop­u­lar.

He added that RMB was not ex­pected to ad­dress liq­uid­ity chal­lenges as enun­ci­ated by the Re­serve Bank of Zim­babwe in its Jan­uary 2014 mon­e­tary pol­icy be­cause the level of trade between the two coun­tries had not yet reached a level where enough crit­i­cal mass could be built to flood RMBs into its mar­ket and Africa at large.

“Very in­ter­est­ingly, cur­rency is­sues are so psy­cho­log­i­cally in­flu­enced, economic agents may not be com­fort­able to just ac­cept one cur­rency overnight when they were used to the US dol­lar. This is a com­plex ma­trix which the RMB will face in Africa,” Mr. Mugano said. South Africa is Zim­babwe’s big­gest trad­ing part­ner, ac­count­ing for at least 40% of its ex­ports and 60% of im­ports, he said, but de­spite this, the rand, the South African cur­rency, has failed to dis­lodge the dol­lar as the dom­i­nant cur­rency be­cause of its volatil­ity.

Wang Yi, a com­mer­cial con­sular with the Chi­nese em­bassy in Harare of­fered a dif­fer­ent opin­ion on the prospects for ac­cep­tance of the RMB in Zim­babwe. In an in­ter­view with Africa Re­newal, he said the

$1.1bn Value of trade between China and Zim­babwe in 2013

adop­tion of the Chi­nese cur­rency by Harare would pos­i­tively in­flu­ence in­vest­ments from China to Zim­babwe, which amounted to about $600 mil­lion last year.

“It’s an op­tion that will in­crease trade between the two coun­tries, as well as lower the cost of do­ing busi­ness. Chi­nese busi­nesses have wel­comed this ac­tion but its suc­cess also de­pends on how lo­cal com­pa­nies em­brace it,” he said.

With a new re­port from the In­ter­na­tional Com­par­i­son Pro­gram, a World Bank-af­fil­i­ated global sta­tis­ti­cal ini­tia­tive, sug­gest­ing that this year China could de­pose the US as the world’s largest econ­omy, Mr. Wang said many more coun­tries will use the RMB to avoid for­eign ex­change losses when trad­ing with China.

Zi­nanayi Steve Zhao, the deputy chair­man of the newly-launched Chi­nese Fed­er­a­tion of Zim­babwe, a lobby group for Chi­nese com­pa­nies in Zim­babwe, said while the use of the RMB was still min­i­mal, it would be a con­ve­nient trad­ing tool for the Chi­nese. Mr. Zhao told Africa

Re­newal that the RMB was a strong cur­rency that is used by many coun­tries in Asia for daily busi­ness trans­ac­tions. “China has only re­cently come into Africa. The RMB would need time. The more trade there is, the more pop­u­lar it will be.”

In 2012, the deputy gover­nor of the Peo­ple’s Bank of China, Li Don­grong, told a busi­ness forum in Bei­jing that China would pro­mote the RMB for set­tle­ment and in­vest­ments with Africa as the de­mand for the cur­rency was in­creas­ing at a time when the con­ti­nent’s econ­omy was ex­pand­ing.

A num­ber of coun­tries in Africa, among them the Bank of Ghana, are us­ing the RMB as part of their set­tle­ment and re­serve cur­rency. Early this year, the Nige­rian cen­tral bank re­port­edly an­nounced that it planned to shift more of its for­eign re­serves into yuan from dol­lars as the RMB gains greater trac­tion in global trade. About 85% of Nige­ria’s re­serves are held in US dol­lars. In March last year, the South African Re­serve Bank signed an agree­ment with the Peo­ple’s Bank of China to in­vest in China’s bond mar­ket.

Mau­ri­tius is one of the coun­tries where a grow­ing de­mand for the Chi­nese cur­rency has been re­ported. And while the Bank of Zam­bia has not yet in­cluded

To­tal trade between China and Africa reached $210.2 bil­lion in 2013

the RMB in its re­serves, it has pledged to in­crease its use for trade set­tle­ments with China. Dur­ing his visit to China in Au­gust last year, Kenyan Pres­i­dent Uhuru Keny­atta promised to host an RMB clear­ing house.

As Sino-Africa ties con­tinue to out­per­form, a num­ber of African cen­tral banks are ap­ply­ing to the Chi­nese Cen­tral Bank for cur­rency swap, which is the ex­change of a loan in one cur­rency for an­other and the plac­ing of a share of their re­serves in the RMB. China has re­mained Africa’s largest trade part­ner since 2009. To­tal trade between China and Africa reached $210.2 bil­lion in 2013, up 5.9 % from the pre­vi­ous year, ac­cord­ing to the data from the China Cham­ber of In­ter­na­tional Com­merce.

Mr. Mugano said the global economic cri­sis mo­ti­vated China’s move to in­ter­na­tion­alise the RMB. Since then, Bei­jing has en­cour­aged the use of its cur­rency in in­ter­na­tional trade, swap ar­range­ments between cen­tral banks, bank de­posits and bond trades.

“It [Bei­jing] signed sev­eral bi­lat­eral cur­rency swap agree­ments, ex­panded set­tle­ments of cross-bor­der trade trans­ac­tions in RMB and al­lowed new forms of RMB op­er­a­tions in the Hong Kong off­shore mar­ket,” he said.

Mr. Mugano noted that the main ob­sta­cles to the fur­ther in­ter­na­tion­al­i­sa­tion of the Chi­nese cur­rency in­cluded the lack of ex­change rate flex­i­bil­ity and limited ac­cess to cap­i­tal mar­kets. This, he said, would con­strain the RMB as a widely used ve­hi­cle cur­rency like the US dol­lar, which plays a unique role in the world of in­ter­na­tional fi­nance – as the world’s re­serve cur­rency, which is used to set­tle most in­ter­na­tional trans­ac­tions.

“Most global cen­tral banks hold their re­serves in US dol­lars. In ad­di­tion, many smaller coun­tries choose ei­ther to peg their cur­rency’s value to that of the dol­lar or forgo having their own cur­rency, choos­ing to use the dol­lar in­stead as is the case in Zim­babwe. This con­trib­utes to the dol­lar’s sta­tus as the world’s most im­por­tant cur­rency,” said Mr. Mugano.

Ac­cord­ing to Swift RMB Tracker, the RMB is al­ready be­ing trans­ferred over Swift by more than 1,000 banks in 85 coun­tries. Swift, or So­ci­ety for World­wide In­ter­bank Fi­nan­cial Telecom­mu­ni­ca­tion, is a global trans­fer sys­tem used by com­pa­nies for fi­nan­cial trans­ac­tions. Re­cent data by Swift shows that the growth in the use of the RMB in tra­di­tional trade fi­nance has pro­pelled the RMB to the sec­ond most used cur­rency in the mar­ket.

China’s rapidly in­creas­ing trade with Africa pro­vides fer­tile ground and de­mand for cross-bor­der RMB set­tle­ments. While its use is still limited, the cur­rency is grad­u­ally pen­e­trat­ing the African mar­ket.

Africa Re­newal/Bo Li

The Chi­nese cur­rency, the yuan.

Panos/Sven Torfinn

A cus­tomer ex­am­in­ing the qual­ity of tow­els im­ported from China in a shop in Kam­pala.

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