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Africa Is Adopting The Chinese Currency

(People's Daily Online)  Yu Meng  2016-02-01 04:33



 
 
 
China unveiled its new Africa strategy during the China-Africa Cooperation Forum Johannesburg Summit on 4th December 2015. 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 States present. Last year at the AU summit Chinese Premier Li Keqiang set the target for bilateral trade volume to top R6 trillion by 2020.

Li Feng, the executive vice-president of Bank of China 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, re-denomination of cross-border trade in Renminbi can reduce the transaction costs by minimizing 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," says Li Feng and adding that the internationalisation of Renminbi will expand beyond Asia, Europe and to Africa.

According to Bank of China, in the first ten months of 2015, the Renminbi trade settlement and investment amount in and out of Africa has grown 35% to 126.6 bn yuan (R254 bn). Half the amount is facilitated by Bank of China’s Johannesburg branch, which was authorized in July 2015 by China’s central bank, the People’s Bank of China, to serve as the clearing bank for Renminbi business, the first in Africa.
 
However, compared to the total amount of pan-China cross-border 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 three quarters of this year, the pan-China cross-border trade settlement in Renminbi has reached cumulatively 5.46 trillion yuan (R11 trillion), the direct investment in Renminbi 1.56 trillion (R3.12 trillion ), a total of 7.02 trillion yuan (R 14.04 trillion).

 

Upon the announcement of the US Fed’s consideration of withdrawal from its quantitative easing scheme, African currencies have depreciated dramatically. The South African rand in December 2015 is half 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 in the Johannesburg Branch points out that the use of Renminbi will give African enterprises more leverage when negotiating price with their Chinese business partners or partners from Asia-Pacific region where Renminbi is widely accepted.  

Li, executive vicepresident of the Johannesburg branch, oversaw a 2.7 bn yuan (R6.08 bn) transaction on Nov 30th 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 authorization 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 also 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, namely South Africa, 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 2015, the South African Reserve Bank (SARB) signed a three-year bilateral swap agreement with the PBoC for the exchange of local currencies of up to 30 bn yuan (R 54 bn).

The South African Reserve Bank (SARB) said in a statement that the purpose of the agreement was to support trade and investment between South Africa and China, and also to act as a mitigating resource for short-term balance of payment pressures.
 
Previously, the SARB signed an agreement with the PBoC that enables the South African central bank to invest in China’s interbank bond market approximately US$1.5bn (R22.5 bn) or 9.3 bn yuan in 2013, which was roughly 3% of South Africa’s official gold and foreign exchange reserves of US$ 50 bn (R750 bn).

Li also mentions the South African Reserve Bank and the Namibian central bank have opened Renminbi accounts each 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 currently, the African central banks invest their Renminbi reserve mainly in Hong Kong and the Chinese interbank bond market.

Li expects more African countries will add Renminbi into their foreign reserves following the granting of the reserve-currency status by the IMF. The reserve currency is commonly used in international transactions and often considered a hard currency or safe-haven currency.

Yi Huiman, governor of Industrial and Commercial Bank of China Ltd (ICBC), China's biggest lender by assets, which also owns 20% of Standard Bank, sketched the Renminbi expansion plan in Africa in a group interview during the FOCAC 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 Renminbi related financial products to invest in.”