China’s push for the International Monetary Fund to endorse its currency, the yuan or the renmibi as a global reserve currency to reflect the country’s growing share in world trade, could help shield Africa from inordinate exposure to the dollar.
Africa’s trade with China is expected to reach $385 billion by the end of 2015, creating demand for cross-border yuan settlements, which are now expensive because the transactions have to be first settled in the American dollar, the leading reserve currency.
Yi Gang, Vice-Governor of the People’s Bank of China, was quoted by the Wall Street Journal as saying that the inclusion of the yuan in the Special Drawing Rights (SDRs) would aid China’s attempts to diminish the dollar’s dominance in global trade and finance and also provide a better trading alternative.
The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can b e exchanged for freely usable currencies.
“We hope the IMF can fully take into account the progress of RMB internationalisation, to include RMB into the basket underlining the SDR in the foreseeable, near future,” said Mr Yi.
The IMF is expected later this year to conduct its next twice-a-decade review of the basket of currencies its members can count toward their official reserves.
Currently, the IMF recognises the Japanese yen, US dollar, sterling pound and the euro as official international foreign exchange reserve assets.
In the meantime, China is hoping to navigate the limited acceptance of the yuan by setting up official clearing windows for yuan transactions in its key markets, such as the one signed with the South African Reserve Bank on Tuesday last week.
Kenya is also pursuing a similar arrangement with Beijing, given the way Chinese contractors have come to dominate big ticket projects like the standard gauge railway.
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Robert Mudida, an economist and lecturer at Strathmore Business School, said the inclusion of the yuan in the global reserve currency list would be a big boost for the Africa which is currently executing multibillion dollar infrastructure projects funded by Chinese loans.
“Africa is increasingly doing business with China and having its currency as a designated reserve will boost this trade. African economies will be the biggest winners, as this will reduce trading costs and currency conversion losses,” Dr Mudida said.
China has become a major destination for a range of African exports as well as an increasingly significant source of a wide range of manufactured goods imported by many African countries. Currently, African economies trading with China settle in dollars when trading between their own African currencies and the Yuan, an extra step that increases the trading costs.
George Bodo, head of financial desk at Ecobank Capital, said it would take a mindset shift for people to use yuan-denominated invoices.
“The key factor is that if you look at Kenya’s foreign currency market, most of the goods exported are priced in dollars with the destination market being Europe. Having some of these reserves in yuan will not boost Kenya’s basket. Having the yuan will only be important when we have trade deals with China, but the advantage will be minimal. Most of the time, the conversion will have to be done in dollars, as it is the reference point,” Mr Bodo said.
Currently, traders dealing with the Chinese market incur additional costs when converting say from the Kenyan shilling to the yuan. Traders are forced to convert to the dollar first, then to the Chinese currency, resulting in loss of actual value and commissions.
Already, several countries on the continent are including the yuan in their reserves. The Bank of Ghana is using the RMB as part of its settlement and reserve currencies. South Africa, Nigeria, Ghana, Zimbabwe, Mauritius and Zambia have already joined a growing list of countries in Africa and the world using the yuan.
China is Zimbabwe’s third largest trading partner after South Africa and the EU. Last year, the trading volumes between the two countries amounted to more than $1.4 billion.
In Nigeria, only 75 per cent of foreign currency reserves are held in dollars, with the yuan forming 10 per cent of the currency reserves.
In March, Nigerian Central Bank Governor Godwin Emefiele said that they were planning to shift more of the county’s foreign reserves from dollars into yuan as the RMB gains traction in the trade with Nigeria. Currently, the country holds more than $4.7 billion of its foreign reserves in Chinese yuan. Nigeria’s bilateral trade with China rose to $23.5 billion last year.
“The biggest advantage in this move for on African economies is that many more countries will use the RMB to avoid foreign-exchange losses when trading with China,” said Mr Bodo.
However, analysts warn that further internationalisation of the Chinese currency in Africa may also have negative impacts on economies, especially because of limited exchange rate flexibility and access to capital markets.
Gerishon Kinori, a treasuries dealer at Bank of Africa, warns that the dollar has long been the common reserve currency for trading in the world of international finance and African central banks will need to strike a balance when using the yuan.