Africa’s use of renminbi is still limited, but growing trade ties with China position the currency to grow on the continent

Just over two years since it began internationalising, China’s renminbi is well on its way to becoming a global currency. Trade redenomination into the yuan, as the currency is also known, has taken place everywhere from Malaysia to the Middle East. And while it might be some time before the renminbi replaces the dollar as the biggest reserve currency, China’s drive to internationalise the redback is picking up pace.

One place that has been slow to cash in on that process is Africa, where the uptake of the renminbi is still in its infancy. Since the first renminbi trade settlement transaction on the continent debuted in South Africa in January 2010, redenomination into the currency has remained concentrated between Africa’s biggest economy and China, leaving other nations lagging.

“This could be because we have a much stronger Chinese banking presence in South Africa than on the rest of the continent,” argues Sarah Baynton-Glen, Standard Chartered’s London-based Africa economist.

Outside of the banking system, African corporates are often not aware of the benefits of transferring funds in the currency, she says.

That is set to change. 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 in 2012, but according to Swift, the provider of financial messaging services, just $5.7bn (or 2.9 percent) of that was settled in renminbi. By 2015, Standard Chartered thinks 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 Ms Baynton-Glen. “As they increase trade with China they are starting to see the advantages of using the renminbi.”

Among 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.

Some companies are already feeling the benefits. In 2011, Portland Steel, a South African metals trader, opened one of Africa’s first onshore Chinese yuan accounts in a bid to facilitate trade relations with buyers in China, the world’s largest consumer of steel.

“China is an increasingly influential trading partner for us, and the ability to exchange funds with both buyers and suppliers via an onshore renminbi account will underpin successful trade relations,” Roy Grayman, Portland Steel’s joint CEO, commented at the time. “Opening a Chinese currency account has given us a competitive advantage, effectively enabling us to quote, sell and settle in renminbi. Immediate access to renminbi also increases our operational efficiencies by mitigating foreign exchange risks and reducing trade settlement costs associated with converting payments and settlements into US dollars.”

Other groups will follow as more African banks - among them big South African and regional giants like Standard Bank and Ecobank - start operating renminbi services in their respective markets.

Africa’s reserve currency?

The uptake of the currency is likely to occur through avenues outside of trade settlement as well. After China and Brazil agreed to their much-heralded $30bn currency swap 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 secure 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.

And if Beijing’s aim is to make a leading global reserve currency out of the renminbi, that process is beginning to gain some momentum in Africa too. Six central banks on the continent either hold, or have stated intention to hold, reserves in renminbi. The most recent to add to their Chinese currency holdings were the central banks of Nigeria and Tanzania who last year bought bonds worth a cumulative Rmb500m ($81.5m) in an issue from the China Development Bank, the country’s state development lender. In fact, those two African countries accounted for one fifth of the uptake of that three-year Rmb2.5bn issue, according to Standard Bank, which handled the bond.

With the renminbi continuing its strong performance, the larger African economies have potential to expand those holdings. Both South Africa and Nigeria, with around $48bn each in foreign exchange reserves, could become larger buyers.

“Nigeria has suggested they could invest up to 10 percent of their reserves in the Chinese yuan,” says Standard Chartered’s Ms Baynton-Glen. “But there is also the potential for a lot more African countries to begin looking at holding the renminbi in their reserves, not only because it is reflective of their trading relationships, but because central banks also have the expectation that the renminbi is going to appreciate - so it’s a high yield asset.”

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.

Dim sum hunger

As the currency continues its rise, that should also boost appetite for China’s offshore ‘dim sum’ bond market in Africa. A number of African countries enjoyed huge demand for their eurobonds over the last couple of years, and the continent’s biggest economies - South Africa and Nigeria - are likely to be the first to issue yuan-denominated debt, analysts say.

“We think that the dim sum market in Hong Kong is something we should tap into,” Nigeria’s central bank governor, Lamido Sanusi, tells 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 says.

A systems approach

There are some obvious obstacles to the growth of the currency in Africa - not least that the process is still being led by South Africa. Even with education of the rest of the region’s sovereigns and corporates, systems set up to bill in dollars or local currency will need redesigning.

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

But the ball is already rolling. “This is a trend that is in very early stages and it will take time,” says Standard Chartered’s Ms Baynton-Glen. “But it’s a long-term trend and we are going to see it pick up.”