Bulls n Bears Entrepreneurship Zone ::Philip Panaino: Could Africa’s long-term trading currency be the renminbi?

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In global trade corridors, the renminbi (RMB) is maturing, albeit with some
teething issues as it evolves from an emerging-market currency to a
fundamental global reserve.

In 2016, policymakers in China pivoted towards an agenda of economic
stability, inadvertently allowing the RMB internationalisation project to
find its own feet for the first time. According to SWIFT data from March
2018, the RMB is the sixth-most active currency for domestic and
cross-border payments, trailing the Canadian dollar.

But the data also shows that the RMB accounted for only 1.62% of domestic
and cross-border payments in that period. Furthermore, despite more than 10%
of payments from Africa ending up in China, the use of the RMB remains low,
at only 0.1% of all payments. Fluctuations in foreign exchange (FX) and a
resurgence of the more traditionally used currencies means that RMB volumes
unilaterally decreased across both payments and trade finance globally in
2017.

In some quarters, questions are being asked about whether figures like
these mark the end of the rapid growth of RMB adoption. We don’t believe
they do. Stabilising volumes are not likely to dent the RMB’s long-term
broader appeal, especially in Africa where its trajectory from peripheral to
mainstream trade currency is particularly conspicuous.


Belt and Road boost


China’s Belt and Road initiative (OBOR) is expected to expedite
cross-border investments, and will play an important role in promoting the
RMB’s internationalisation. Long-term commitments – such as a Chinese-led
railway project in Kenya, and the 600-megawatt Karuma Hydroelectric Power
Station under construction in Uganda – will generate demand for the currency
and act as drivers to facilitate RMB usage.

With OBOR fostering financial cooperation and trade in Africa, it makes
economic sense for countries along the modern ‘Silk Road’ to use the Chinese
currency. Using the RMB to pay back loans or grants received from China
lowers exchange rate risk and reduces the cost of cross-trade investment.

The deepening trade relationship between China and Africa clearly points to
a longer-term story in which the RMB will play a more strategic role in
facilitating cross-border trade.

According to SWIFT data, the number of inter-bank relationships between
China and Africa has increased substantially, from 20 in 2008 to 186 in
2017. At the same time, Chinese companies and banks are using the RMB to
trade with an increasing number of African countries.

Ghana, Nigeria, Mauritius and Zimbabwe use the RMB for payments and
reserves, for instance, and Nigeria’s central bank has 10% of its foreign
reserves in RMB. With an expected rebound in China and sub-Saharan Africa
trade in 2018, we remain very confident in the RMB’s future in Africa.

With the right support, the currency will develop more meaningfully.


The renminbi’s next chapter


Several important factors will need to align to facilitate the RMB’s next
growth phase in Africa. First, increased RMB usage in African trade finance
will need to be further supported by central banks to ensure continual
traction. Encouragingly, numerous central banks across the continent are now
using the RMB as a reserve currency and many others have indicated their
plans to expand their holdings. This trend is not only providing an
incentive for African corporations to invoice more trade in RMB, but also
demonstrates to the market that confidence in China’s currency is increasing
at an institutional level.

Second, for volumes to stabilise in Africa and for corporations to take
advantage of a maturing trade currency, the RMB will need to be used more
strategically. Widespread adoption of the currency in Africa will not be a
one-size-fits-all approach. However, broader adoption of the RMB will have
greater potential to occur when foreign exchange markets develop further in
Africa and RMB pioneers gradually transition its usage from an export
currency to a supply chain constituent. Furthermore, the availability of
more hedging solutions and specialist RMB expertise should promote more
strategic usage.

Third, for RMB adoption to take its next step in Africa, it is essential
for more knowledge to be shared with corporates. A sustainable platform
across the continent would help build better understanding of the RMB, and
potentially increase the dissemination of specialist risk management
knowledge.

To address these challenges, Africa will need to create an RMB ecosystem to
facilitate the next phase of trade finance across the continent. This will
not happen overnight, and will require substantial domestic bank involvement
and expertise from foreign players to succeed.

Philip Panaino is the regional head of transaction banking for Africa and
the Middle East at Standard Chartered Bank. –Howwemadeitinafrica 



Philip Panaino

 

 

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