Yuan's internationalization gains traction

Updated: 2016-08-26 08:39

By Samantha Singh(China Daily Europe)

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The renminbi is penetrating the global financial system, with Africa being no exception

Sino-African relations have strengthened over the past decade, with the evolution of the relationship characterized by deepening trade and investment ties.

The proliferation of the Chinese economy over the past two decades has indeed been positive for African and global growth. As China intensifies its renminbi internationalization strategy and capital account liberalization, the renminbi's projected growth as a global trade currency is considerable. Meanwhile, deeper integration of the Chinese economy into the global financial system has emboldened a broader use of the RMB.

Last year, the International Monetary Fund added the Chinese RMB to its basket of currencies with special drawing rights. This comes into effect on Oct 1.

Yuan's internationalization gains traction

The RMB is the fifth currency in the basket, along with the dollar, the euro, the yen and the pound, and it will have a weighting of 10.92 percent. The inclusion will diversify the basket, making it more representative of global trade and financial flows, and will set a solid foundation for the future growth of the RMB internationally.

Interestingly, due to the introduction of the RMB, the weighting of the euro will drop sharply to 30.93 percent from 37.4 percent, while that of the pound falls to 8.1 percent from 11.3 percent. Even pre-Brexit, China had already exemplified great influence over global markets, suggesting that use of RMB will likely gain even more traction under current circumstances.

Brexit will probably mean that China will reassess its commercial strategies in broader Europe due to the possibility of poor export prospects to that region. It is unlikely that Brexit will have a vastly negative impact on RMB liberalization, but China may consider another financial hub for its RMB internationalization endeavor if London's luster starts to fade.

China's RMB internationalization endeavors seek partially to improve the use of RMB in international trade and to develop more offshore markets for the currency. According to Swift, RMB ranks sixth in terms of world payment currencies, with more than 1,800 financial institutions making use of the RMB for payments worldwide.

Needless to say, the renminbi is penetrating the global financial system, with Africa being no exception.

As China continues to define and broaden its commercial strategy for Africa, it is likely China will continue to build on the momentum it has already realized forging economic and geopolitical ties with African economies. In doing so, China continues to exert influence on the continent's development.

More recently, China has been increasingly involved in security and conflict resolution. The internationalization of the RMB will influence the way business is done in Africa, as China is the continent's largest trade partner. In 2015, bilateral trade reached $149.8 billion, up from $28.8 billion 10 years ago, according to the International Trade Centre.

However, bilateral trade between the two stood at $160.1 billion in 2014. Although this represents a 6.5 percent year-on-year contraction in value of trade with Africa, it is notable that, despite this impact, China-Africa trade growth since 2008 has been material - increasing by 63.4 percent from $91.7 billion in 2008 to $149.8 billion last year.

In addition to strong trade ties, China has contributed to the burgeoning investment in Africa and, more crucially, is providing financing for a large number of infrastructure projects on the continent.

According to the Chinese Ministry of Commerce, by 2014, the nation's foreign direct investment stock was $32.4 billion, up from $9.3 billion five years earlier.

The China Africa Research Initiative says that in 10 years up to 2014, the Chinese government, banks and contractors extended $83.6 billion in loans to African governments and state-owned enterprises.

The use of the RMB in Africa has gained traction as a consequence of the evolution of the continent's relationship with China. In particular, settling trade deals in RMB promotes price transparency and reduces the cost of international trade, and gives the continent access to a wider range of Chinese suppliers.

Last year, South Africa launched the first RMB clearinghouse in Africa aimed at speeding up transactions and reducing the need for US dollar settlements. In Zimbabwe, the RMB has become legal tender in the country's multicurrency regime along with eight other currencies. In July, direct cash exchanges were launched between China and Kenya. Similarly, late last year, Angola and China signed an agreement allowing the reciprocal use of the currencies of both countries.

In addition, many African countries including Nigeria and Ghana include the RMB in their foreign exchange reserves. Crucially, the tone from Beijing on an innocuous mutually beneficial partnership between China and Africa suggests growing facets to this partnership, which is likely to encourage broader use of RMB on the continent.

The author is an Africa strategist at Standard Bank Group. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 08/26/2016 page12)

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