Growing China-Africa trade ties position the renminbi to continue its internationalisation on the continent

Just over two years since its began its process of internationalisation, China's renminbi is well on its way to becoming a global currency. Trade redenomination into renminbi has taken place everywhere from Malaysia to the Middle East, although the process is still in its early stages across Africa.

But growing trade ties between China and Africa will drive a rapid uptick in the use of the renminbi on the continent, particularly in trade settlement, according to Standard Chartered.

China-Africa trade hit almost $200bn dollars in 2012, but according to Swift, the provider of financial messaging services, just $5.7bn (or 2.9 per cent) of that was settled in renminbi. By 2015, Standard Chartered argues that that figure will reach $38.5bn - or around 10 percent of total projected trade flows.

"We see the most potential for increased use of the renminbi as a trade settlement currency among African importers of Chinese goods," explains Sarah Baynton-Glen, the bank's London-based Africa economist. "As they increase trade with China they are starting to see the advantages of using the renminbi."

Amongst those advantages are reduced foreign exchange and interest rate risks, as well as the obvious cost savings accrued by not having to convert currencies. Most corporates would gain cost savings of 2-3 percent by settling trade in renminbi, Standard Chartered claims.

The uptake of the currency is likely to occur through other avenues as well. After China and Brazil agreed their much-heralded $30bn currency swap agreement earlier this year, Standard Chartered also foresees a three year bilateral currency swap of around $20bn between China and South Africa.

China is now South Africa's largest trading partner, and the countries are looking to shore up their flows. "The swap would act as a standby facility to shore up renminbi reserves and to ensure liquidity in the event that there are shocks to international markets and credit runs short," Ms Baynton-Glen says.

With trade ties growing and the renminbi performing well, you can expect more of the continent's central banks to start holding reserves in the Chinese currency. South Africa, Nigeria and Tanzania are among the handful of countries that already do so, and in 2012, the People's Bank of China predicted that within five years 20 percent of Africa's central banks' foreign reserves would be held in yuan.

That gives those countries the opportunity to start tapping into the offshore 'dim sum' bond market for Chinese-denominated debt. Again, South Africa and Nigeria will likely be the first to the party.

"We think that the dim sum market in Hong Kong is something we should tap into," Nigeria's central bank governor, Lamido Sanusi, recently told This is Africa. "We have always said that if Nigeria agreed an oil contract with China and accepted renminbi as a means of payment it would have sufficient renminbi revenues to issue a dim sum bond."

That plan may face some political roadblocks though: "As a central bank we can only make recommendations - the government now has to work out its plans. But we have put the option on the table," Mr Sanusi said.

There are some obvious obstacles to the growth of the currency on the continent - not least that the process is still being led largely by South Africa, Africa's biggest economy. Even with education of the continent's sovereigns and corporates, systems designed to bill in dollars or local currency will need redesigning.

The uptake might also be constrained by the nature of Africa's commodity-dominated trade relationship with China, other analysts point out: "There is a mindset of commodities being a dollar-based product, so that could constrain the process of internationalisation catching on," said Daragh Maher, a foreign exchange strategist at HSBC in London.

"This is a trend that is in very early stages and it will take time," Ms Baynton-Glen says. "But it's a long-term trend and we are going to see it pick up."

Sarah

To date there hasn't been a major pick up in transfer between China and Africa in the RMB. So even Nigeria where they've already said they are investing central bank reserves in the CNY we haven't seen the pick up that we've seen in SA for eg. Part of this could be because we have a much stronger Chinese banking presence in SA that on the rest of the continent. At least at this stage because it's at such an early stage, and the first transfer was only in June 2010 in SA, it's not just the banking system but also in terms of awareness. We know that a lot of corporates are not aware of the benefits of transferring funds in the RMB rather than in USD or EUR, so that's prevented uptake in other regions. It is in very early stages so we expect it will take time, but it's a long term trend and we are going to see a pick up in the use of the CNY in terms of trade settlement or payments between China and Africa.

Why?

the bilateral trade between China and Africa has increased to 198.5bn dollars and that compares to 160bn just a year earlier, so it's picking up very rapidly. As part of this, particulary among African importers of Chinese goods, which is where we see the most potential for increased use of the RMB as a trade settlement currency, as they increase trade with China they see the advantages of using the RMB: it helps cut out some of the FX risks as well as the costs, because if you are transfering funds into USD and back on both sides of the transactions then that adds extra costs.

there is a lot of interest in terms of using the RMB in the future to settle trade between China and Africa, but it's a case of setting up the systems to make this possible, as well as increasing awareness.

African CB reserves/

For the time being the central banks that are most likely to hold reserves are the larger ones. Countries like Nigeria have suggested they could invest up to 10 percent of their reserves in the CNY. We definitely think that a lot more African countries could begin looking at holding the RMB in their reserves particularly as China becomes more important as a proportion of their international trade: it's reflective of their trading relationship if they hold the RMB in their reserves.

Central banks also have the expectation that the RMB is going to appreciate. Here at SC we think that the RMB could reach about 6.1 against the USD by the end of this year. So there are strong benefits of holding RMB: as well as diversifying reserves to make them more sustainable, they are also high yield assets.

China bonds

It will be most likely that dim sum bonds will be issued by some of the higher grade African sovereigns like SA or Nigeria, because they are highly rated and because of demand on the Chinese investor side.

Corporate side: there is definitely interest in issuing chinese denominated bonds but again it's a case of increasing awareness of the benefits of issuing a bond demoninated in RMB: the benefits of having access to a new investor base, new financing channels, as well as the lower cost of funding that you can get from issuing a bond in the RMB are key issues corporates need to be made more aware of. But the corporates issuing dim sum bonds are likely to be those already trading with China or doing business in China themselves, and those that are higher rated because they will get the most demand from investors.

Currency swap

The countries looking at this will be SA and Nigeria because they are the countries with the hightest reserves held in RMB. The purpose of the bilateral currency swap would be a standby facility that could either be used to shore up RMB reserves, or also as we see increasing amounts of trade settled in RMB, it's a liquidity in the event that there's a shortfall in the amount of RMB that they are able to get hold of. It is likely to be SA first because of the brics ties.

Daragh

Internationalisation of the renminbi is a trend that is accelerating rather than retreating and Africa is going to form part of that trend because Africa is an important trading partner for China, because of the commodities that are feeding the China growth story. So it has further legs to run.

Trade in RMB is roughly 10-12 percent of China's trade, so already a substantial proportion of trade is conducted through the currency. From Africa's perspective the advantage of demoninating their trade with China in RMB is that they can reduce hedging costs and many Chinese corporates are wanting to demoninate their business in RMB, and as a result would be willing to offer discounts to their partners who are wanting to do the same. There is a tangible price benefit to African exporters and importers if they are willing to play a part in internationalisation of the currency trade with Af 5% of China total.

The benefits are clear and have been demonstrated elsewhere in terms of cheaper financing and cheaper transaction costs and so it would be strange to find a pushback in Africa against that. But in Africa if a lot of your exports are commodity based there is this mindset of commodities being a dollar based product, so maybe that's why you are seeing a slower process of internationalisation catching on. But most people trading with China recognise the size of the growth story and want to do anything that they can to have an advantage in dealing with China, and transacting in RMB is one of those advantages.