Yuan
role expands its Africa
presence By Gavin du Venage
For decades, Africa's traders have
demanded US dollars or, more recently, euros when
closing a deal; now China's yuan is being adopted
across the continent by businesses and banks to
settle debts, raise loans and pay for imports and
exports.
Until recently, few people in
Africa would have been able to name China's
currency. This has changed with stunning speed
over the past few years, boosted by the 2008
global crisis when the ability to borrow dollars
by importers and exporters was substantially
reduced.
For China too, dependent on
exports, the US and Eurozone liquidity crunch was
an alarming event. As a result, it also quietly
encouraged trading
partners to settle more of their bills in yuan.
Few regions embraced this approach more
enthusiastically than Africa.
So when Li
Dongrong, the assistant governor of the People's
Bank of China, said a couple of weeks ago that
Beijing would now actively promote its currency
for settling trade and investment with Africa, he
was merely confirming what has already become a
reality in many African countries.
Li told
a forum in Beijing that China's central bank would
encourage the use of the yuan, also known as the
renminbi (RMB), as demand for the currency in
Africa increased and the continent's economy grew.
"Chinese companies are happy to bypass the
dollar," says Peter Poon, a yuan sales and product
development specialist at Standard Bank in
Johannesburg, Africa's largest bank by assets.
"And African companies have been very receptive to
the idea of switching to yuan-based transactions."
So receptive that Standard Bank expects at
least 40% of the US$120 billion in trade between
Africa and China each year to be settled in yuan
by 2015. The bank has branches in 17 countries on
the continent, and is moving to providing yuan
deposits and withdrawals at all of them.
Much of the uptake is by the thousands of
Chinese companies operating across Africa. The
yuan is used to pay suppliers back home, settle
debts and pay employees. African companies doing
business with Chinese sub-contractors are also
switching to yuan to pay their bills. In doing so,
they cut costs incurred by using a third currency
to settle trades.
"It maximizes
efficiency," says Mr Poon. "It also saves
transactional costs involved in converting from a
local currency like the South African rand, to
dollars, then to renminbi."
The switch to
yuan is not only at commercial level. Central
banks too are beginning to see it as a reserve
currency. Traditionally, central banks ensure the
stability of a country's national coin by keeping
a minimum holding of gold, dollars and euros.
Nigeria, for instance, holds almost 80% of its
reserves in dollars, according to Bloomberg.
Last year, Nigeria's central bank
governor, Lamido Sanusi, said this would change
and that the country would shift up to 10% of its
reserves to yuan, around $3.5 billion worth. This
was partly to diversify risk against a declining
greenback, but also to ease trade with neighbors.
With more and more countries in the region
settling transactions in yuan, the country needs
readily available reserves to back them.
However, it is also likely that Nigeria is
hanging onto its dollars, while exchanging its
local currency reserves, held in the
near-worthless niara, to yuan.
"To that
end, it makes loads of sense, as they are
effectively swapping an inferior debt instrument -
Nigerian currency - for a superior debt instrument
- Chinese currency - seemingly at par value," says
Adam Choppin, a Sino-Africa investment specialist
at Consultancy Africa Intelligence in London.
"That the yuan is not as openly
convertible as other currencies is not as relevant
when it might be a superior store of value than
the relevant local currency - the naira, in this
case."
African bankers are also aware that
the US dollar can go through rough times. By
diversifying they not only spread the risk, but
may also be betting on the yuan's steady rise, and
as a knock-on effect, increase the value of their
reserves.
Nigeria in particular is
vulnerable to dollar moves, as it derives 95% of
its foreign exchange earnings from oil exports.
These in turn are priced in dollars, and even
though oil has traded well above $100 a barrel for
the past few years, Nigeria has seen its foreign
exchange holdings shrink as the greenback has
fluctuated. The yuan is therefore an added hedge
against currency moves.
The yuan is still,
however, a long way from threatening the dollar as
the continent's most important foreign currency.
In realizing its currency ambitions, Beijing faces
a major hurdle: even though many African countries
have embraced the yuan, they still rely on the US
dollar to price, and receive payment for, major
commodities such as gold and oil.
At
present, the largest users of China's currency in
Africa are exporters of manufactured goods in
China and their counterparts on the continent,
says Razia Khan, head of research for Africa at
Standard Chartered in London.
Even those
countries with which China enjoys significant
bilateral trade are reliant on dollars for their
commodity exports. "Angola, which is China's top
trading partner in Africa, is only expected to
take 5% of the total yuan trade settlement market,
because its trade with China is dominated by oil,"
says Khan.
However, China's increasing
importance in global commodity trade makes a the
shift of pricing commodities in yuan all but
inevitable over time. Those raw materials not
dependent on the dollar as a benchmark price unit
will be the first to move, says Khan.
Iron
ore, metallurgical coal and steel, commodities
over which the dollar does not have exclusive
settlement rights, would be first. Indeed, it has
already begun: the first yuan trade settlement in
Africa was an intra-company import of steel from
South Africa by a Chinese state-owned steel
company.
Base metals, particularly those
like copper, for which China is one of the world's
largest consumers, are expected to follow suit.
"Should this shift in the
commodity-pricing currency take place, it will
give a strong boost to yuan circulation in Africa,
especially in the major ore and metal exporting
markets, such as South Africa and Zambia," says
Khan.
So while, for now, the dollar and
euro will still reign as the currencies with which
to close deals in Africa, they should not get too
comfortable.
"The wider significance has
more to do with the long-term pressure it puts, or
should put, on policymakers in the US and Europe
to correct their troubled monetary and fiscal
policies," says Mr Choppin. "To be sure, we are at
least 15-20 years away from the yuan being any
form of 'threat' to the major reserve currencies,
but the Chinese are clearly, and wisely, laying
the groundwork now as a part of an intelligent
long-term strategy."
Gavin du
Venage is a business writer in South Africa,
specializing in commodity and investment analysis.
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