Africa trade using China’s currency set to reach US$100bn

The steady internationalisation of China's renminbi will see at least 40%, or US$100-billion, of China's trade with Africa being made using the currency unit by 2015, according to research just published by Standard Bank Group.

Standard Bank economist Jeremy Stevens, currently based in Beijing, says the US$100-billion in renminbi-denominated trade by 2015 amounts to more than the total Sino-African trade in 2010. In addition, at least $10-billion of Chinese investment into Africa will be denominated in renminbi over the same period.

He says among the main benefits for Africa of renminbi internationalisation will be cheaper funding and lower transactioncosts, all on a large scale.

In the paper titled "BRIC-Africa: the redback's rise is an opportunity for Africa", Stevens explains that renminbi internationalisation is the latest manifestation of China's continuously shifting domestic economic system.

"China wants to increase the pairs against which the renminbi can trade, broaden the currency's geographical reach and allow the renminbi for investment purposes. The change, which will be gradual, is symptomatic of a more multi-polar world," says Stevens.

He argues that there is a great deal of mis-information about China's intentions. "Anchored in a quasi-Cold War era mentality, renminbi internationalisation is frequently presented in rather sinister undertones," writes Stevens.

"However, internationalisation is really about adding efficiency and resilience to China's own trade and investment flows, and triggering further financial liberalisation. China firms will continue to 'go out', but Africa more than anywhere else offers them a new opportunity to 'go out in renminbi'."

He says that internationalisation must not be conflated with talk about a new global reserve currency. Internationalisation is first about transactions: buyers and sellers doing business in the currency. A reserve currency, on the other hand, is about the desire to hold the renminbi as a store of value. Renminbi internationalisation is about the former, intending to add efficiency and resilience to China's trade and investment flows.

"China is not about to dump US treasuries in some maligned quest to trigger a financial collapse and depreciation of the US dollar. China will embark on a gradual diversification of additional reserves in a manner that prevents instability."

Most important, elevating the role of the renminbi is about domestic Chinese affairs. Internationalisation will diminish the structural accumulation of reserves; create a buffer in Hong Kong, preventing liquidity from flooding the mainland; andspur additional financial market liberalisation, writes Stevens.

He says Africa can help China reach critical mass with the internationalisation process, and that African nations should use the alignment of China's policy trajectory to its advantage.

"China and Africa have a head start: close high-level political relations and robust institutions have been developed over the past decade during which China's commercial leverage has risen sharply because successes, small and large, have already been plentiful."

Standard Bank estimates that about 1 500 Chinese firms are operating in the 18 African nations where it has operations.

"There are as many as one-million Chinese people in Africa. Firms will want to grow their businesses in Africa, open renminbi accounts and use renminbi products; workers will want to send money home," says Stevens.

He believes that investment in Africa will find support through cheaper sources of funding (in Hong Kong) and better protected capital (through hedging instruments). This will result in more favourable terms for Africa projects. The support for currency internationalisation by political elites also means that funding could be specifically siphoned to renminbi-financed projects.

"Internationalisation will lower transaction costs, enable better working capital and improve risk management practices, which along with various incentives, will support trade flows – especially exports of Chinese-owned and produced manufacturing goods."

He says African financial institutions will play a critical facilitating role, especially those with a pan-African reach. In money markets, short-term renminbi credit faculties, deposit and call accounts will be demanded. In global markets, requirements will include a host of trading products. In transactional products, Chinese corporates will need renminbi-denominated accounts, cash settlement transactions and notes. In addition, remittance flows will need to be calibrated. More investment flows will also require on-the-ground expertise.

Stevens says China will start the programme by targeting African partners which aredestinations for sizable Chinese exports, regional heavyweights and have mature financial markets: first Nigeria and South Africa, then Kenya, and afterwards Angola and Ghana
 

The steady internationalisation of China's renminbi will see at least 40%, or US$100-billion, of China's trade with Africa being made using the currency unit by 2015, according to research just published by Standard Bank Group.

Standard Bank economist Jeremy Stevens, currently based in Beijing, says the US$100-billion in renminbi-denominated trade by 2015 amounts to more than the total Sino-African trade in 2010. In addition, at least $10-billion of Chinese investment into Africa will be denominated in renminbi over the same period.

He says among the main benefits for Africa of renminbi internationalisation will be cheaper funding and lower transactioncosts, all on a large scale.

In the paper titled "BRIC-Africa: the redback's rise is an opportunity for Africa", Stevens explains that renminbi internationalisation is the latest manifestation of China's continuously shifting domestic economic system.

"China wants to increase the pairs against which the renminbi can trade, broaden the currency's geographical reach and allow the renminbi for investment purposes. The change, which will be gradual, is symptomatic of a more multi-polar world," says Stevens.

He argues that there is a great deal of mis-information about China's intentions. "Anchored in a quasi-Cold War era mentality, renminbi internationalisation is frequently presented in rather sinister undertones," writes Stevens.

"However, internationalisation is really about adding efficiency and resilience to China's own trade and investment flows, and triggering further financial liberalisation. China firms will continue to 'go out', but Africa more than anywhere else offers them a new opportunity to 'go out in renminbi'."

He says that internationalisation must not be conflated with talk about a new global reserve currency. Internationalisation is first about transactions: buyers and sellers doing business in the currency. A reserve currency, on the other hand, is about the desire to hold the renminbi as a store of value. Renminbi internationalisation is about the former, intending to add efficiency and resilience to China's trade and investment flows.

"China is not about to dump US treasuries in some maligned quest to trigger a financial collapse and depreciation of the US dollar. China will embark on a gradual diversification of additional reserves in a manner that prevents instability."

Most important, elevating the role of the renminbi is about domestic Chinese affairs. Internationalisation will diminish the structural accumulation of reserves; create a buffer in Hong Kong, preventing liquidity from flooding the mainland; andspur additional financial market liberalisation, writes Stevens.

He says Africa can help China reach critical mass with the internationalisation process, and that African nations should use the alignment of China's policy trajectory to its advantage.

"China and Africa have a head start: close high-level political relations and robust institutions have been developed over the past decade during which China's commercial leverage has risen sharply because successes, small and large, have already been plentiful."

Standard Bank estimates that about 1 500 Chinese firms are operating in the 18 African nations where it has operations.

"There are as many as one-million Chinese people in Africa. Firms will want to grow their businesses in Africa, open renminbi accounts and use renminbi products; workers will want to send money home," says Stevens.

He believes that investment in Africa will find support through cheaper sources of funding (in Hong Kong) and better protected capital (through hedging instruments). This will result in more favourable terms for Africa projects. The support for currency internationalisation by political elites also means that funding could be specifically siphoned to renminbi-financed projects.

"Internationalisation will lower transaction costs, enable better working capital and improve risk management practices, which along with various incentives, will support trade flows – especially exports of Chinese-owned and produced manufacturing goods."

He says African financial institutions will play a critical facilitating role, especially those with a pan-African reach. In money markets, short-term renminbi credit faculties, deposit and call accounts will be demanded. In global markets, requirements will include a host of trading products. In transactional products, Chinese corporates will need renminbi-denominated accounts, cash settlement transactions and notes. In addition, remittance flows will need to be calibrated. More investment flows will also require on-the-ground expertise.

Stevens says China will start the programme by targeting African partners which aredestinations for sizable Chinese exports, regional heavyweights and have mature financial markets: first Nigeria and South Africa, then Kenya, and afterwards Angola and Ghana