Africa Welcomes China’s RMB Internationalization

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By Vivian Ni

Sept. 7 – More and more Chinese manufactured goods will be exported in the country’s local currency (the renminbi, or RMB), rather than in U.S. dollars, and Africa is becoming one of the first destinations to seek large scale RMB-denominated trades and investment. The progress China has made in its RMB internationalization will not only increase efficiency and resilience in China’s trading and investment transactions, it will also challenge the role of the U.S. dollar as the world’s principal reserve currency.

The South Africa-based Standard Bank recently published a research report saying that at least 40 percent, or US$100 billion, of China’s trade with Africa will be denominated in RMB by 2015. In addition, Standard Bank economist Jeremy Stevens predicted at least US$10 billion of Chinese investment into Africa will be conducted in RMB over the same period.

In his paper titled “BRIC-Africa: The Redback’s Rise is an Opportunity for Africa,” Stevens acknowledged the “head start” China and Africa have already seen:

“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.”

Among the various successful stories, the improvement in China and Africa’s trading ties is salient. Thanks to the establishment of the Forum on China-Africa Cooperation and the availability of the trade corridor, China-Africa trade volume surged by nearly US$120 billion over the past 10 years, from US$7.3 billion in 2000 to a record high of US$127 billion in 2010.

More and more Chinese companies have also rushed to Africa to conduct direct investment. As Standard Bank estimates, there are around 1,500 Chinese firms operating in 18 African nations nowadays.

“There are as many as 1 million Chinese people in Africa,” says Stevens.

Such a considerable Chinese business presence in Africa has given businesspeople more reasons to hope for accelerating RMB internationalization, since using local currencies will obviously make transactions more efficient and investments more resilient.

“[Just as Chinese] firms will want to grow their businesses in Africa, open RMB accounts and use RMB products; workers will want to send money home,” Stevens says.

Stevens also believes the more internationalized RMB will help boost both trade and investment flows: exporters of Chinese-owned and produced manufacturing goods will be encouraged by lower transaction costs, better working capital and improved risk management practices; investors will be motivated by being able to find support through cheaper funding sources (in Hong Kong) and better protected capital (through hedging instruments).

Emphasizing that Africa “more than anywhere else” offers Chinese firms the opportunity to “go out” in RMB, Stevens points out that RMB liberalization will result in more favorable terms for Africa projects, since funding could be specifically siphoned to RMB-financed projects in the current Chinese policy environment.

In addition to traders and investors that may benefit from RMB liberalization, financial institutions of both countries may also see more business opportunities as an array of monetary, trading and transactional products will be demanded in the future. Recently, China’s largest state-owned commercial bank the Industrial and Commercial Bank of China (ICBC) has already made a move in a bid to grab the emerging opportunities in Africa. In addition to holding 20 percent of shares in the Standard Bank, ICBC has also purchased 80 percent of Standard Bank Argentina’s equity. The close ties between the two banks will likely enable the ICBC to become the major RMB cross-border settlement service provider in Africa, bringing in huge profits.

China’s policy to promote RMB internationalization has made some Western economists speculate that the RMB may overtake the U.S. dollar as the world’s principal reserve currency during the next decade. A recent commentary by Reuters points out that although still holding a very prudent attitude towards RMB liberalization, China realizes it needs the rise of RMB to make the domestic market more transparent for international investors, and reduce its exposure to foreign currencies – especially the U.S. dollars which it is beginning to trust less.

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