The growing trade between Kenya and China has led to Kenyan businesses opening yuan accounts, creating new income opportunities for local banks.

Local commercial banks say traders are seeking to reduce the currency costs incurred when converting shillings into dollars, then the dollars into yuan, referred to as a renminbi (RMB) transaction. The renminbi is the official currency of China, and its primary unit is the yuan.

“We have a significant number of clients who have RMB denominated transactions, and they have been growing. We now have accounts available for them,” said Charles Macharia, head of the China related desk at Citibank Nairobi.

The increased demand for yuan accounts has seen local banks rush to offer the service. CFC Stanbic is one of them, while Bank of Africa, Commercial Bank of Africa, and Barclays Bank are reportedly set to introduce the product soon.

Traders say going through the RMB transaction to settle their yuan denominated obligations raises the transaction costs and exposes them to significant currency volatility.

“We are exposed to volatility risks of three currencies if we use dollars; hence, the risk is reduced if we bypass the greenback. We are also supposed to pay a fee for the transaction and banking costs,” said Justus Ngugi, managing director at Stantech Motors.

“When our Chinese suppliers quote us in dollars, we’re paying higher prices than we should because they have to take a gamble on the dollars,” he added.

Mr Ngugi estimates that RMB transactions add an extra 5 per cent to the value of the 300 cars that his firm imports from China every year.

Kenya imported goods worth Ksh144 billion ($1.7 billion) from China last year, making the East Asian country its third largest trading partner after the United Arab Emirates and India.

The bulk of imports from China were machinery, vehicles and parts, steel, coal, electronics, textiles and household goods. The increase in yuan- denominated trade settlement is hence driven by real corporate need.

On average, goods from China are cheaper; Stantech says its car imports are on average priced 20 per cent lower than Japanese imported vehicles.

The increased demand for the yuan in Kenya has also been attributed to a surge in Chinese companies in the country.

The Chinese embassy in Nairobi estimates that there are 200 Chinese companies in Kenya, but says the number could be higher as some don’t report their presence to the embassy.

The Central Bank of Kenya has said it will consider including the yuan in its mix of reserve currencies given the growing trade between Kenya and China, and the rising indebtedness of Kenya to China.

“Some of the factors that inform the decision on the currencies in which to invest reserves are convertibility of the currency, trade volumes — especially imports — denominated in the currency, proportion of the country’s debt in that currency,” CBK said in an email response.

China is the third major individual creditor of Kenya after France and Japan, making it cheaper to service yuan denominated debt with yuan reserves.

Kenya’s debt to China has been rising year-on-year to Ksh32 billion ($376 million) last year from Ksh3.1 billion ($36 million) in 2007.

It is also cheaper to borrow funds from China in yuan denominations than in dollars because the lenders have to factor in the exchange rate risks.

Standard Bank, of which CFC Stanbic is a subsidiary, has launched services for trade settlement in yuan in 16 African countries.

The bank’s business turnover reached 500 million yuan ($78 million) over the past six months, the CEO of Standard Bank China Craig Bond was quoted saying by the China Daily newspaper.

Trade in the Chinese currency still remains low compared with the US dollar, given that yuan transactions are only being used for China-related trade.

Although global acceptance of the yuan seems farfetched, the process could be much quicker in Africa because China’s commercial presence on the continent has risen sharply and Africa’s debt to China is also rising.

Strength of the yuan

The yuan has recently risen to a near two-decade high despite expectations of poor economic growth this year, which the markets had interpreted as likely to weaken the currency.

Mr Ngugi says this has significantly raised the prices of Chinese vehicles in the past two years.

Data from the People’s Bank of China shows that in July and August, 12.3 per cent of the 4.2 trillion yuan ($671.5 billion) in China’s total trade was paid for in yuan, up from 10.7 per cent in the first half of this year.

In comparison, the yuan accounted for less than 1 per cent of China’s total cross-border trade three years ago, when Beijing opened a pilot programme allowing the use of yuan to settle international transactions.

More foreign businesses are willing to pay their Chinese suppliers in yuan, and the currency’s increased volatility has encouraged more Chinese companies to accept yuan payments as a way to avoid future exchange risks.

The yuan has had a bumpy ride since 2011 when it lost ground to the dollar, but has rebounded in recent months.

The Chinese currency has erased its losses and now reached its highest level against the greenback since 1994.