As Africa’s relationship with China matures and deepens, the use of the renminbi as a medium of exchange holds the potential to increase the efficiency and reduce the risk and cost of both intra-African as well as Africa-China and broader Asian trade.
Despite renminbi adoption in Africa presenting some very obvious advantages, Africa’s current use of China’s currency as a medium of exchange remains underweight.
This is partly because China itself has been conservative in its approach to the internationalisation of the renminbi, preferring to allow use of the currency to evolve naturally – as and when people and businesses find it rational to deploy as a medium of exchange.
Africa is wide open for business in terms of settling imported goods from China in renminbi. At the national level, many African countries that experience regular US-dollar constraints have arranged renminbi swap links, allowing them to use renminbi to pay for imports from China. Renminbi swap links allow the Central Bank of Nigeria, for example, to swap naira for renminbi at a set rate. This enables Nigeria to pay for Chinese imports in renminbi whenever needed, effectively removing exchange rate risk for certain key imports. Though overall percentages are still small, renminbi swap links are seeing more African central banks holding larger amounts of renminbi in reserve.
At the individual business level, however, uptake has been slower – at both ends of the Africa-China trade corridor.
Chinese manufacturers are largely importers of both raw materials and industrial patents. Both of these are denominated in US dollars. Since such a large percentage of Chinese imports and industrial production costs are US-dollar driven, Chinese manufacturers prefer to invoice in US dollars to offset their US-dollar import costs. The recent sustained depreciation of the renminbi against the US dollar has also made renminbi receivables less attractive than US-dollar receivables for Chinese exporters. The main hurdle to broader renminbi adoption in Africa is an absence of broad awareness – in either Africa or China – that renminbi is easily attainable outside China. The current reality is that the ready availability of renminbi could easily support trade, transactions and payments across Africa.
Looking ahead, the biggest opportunity for renminbi adoption lies in the enormous number – and value – of Chinese infrastructure projects in Africa. While, to date, none of these large projects have been delivered in renminbi they present a huge opportunity to build a broader renminbi-reliant ecosystem of suppliers and services that deliver and settle domestically in Africa in renminbi. Given the spread and scale of Chinese infrastructure projects across the continent this would very quickly put renminbi in the hands of ordinary Africans, in a context in which Africans can use renminbi for local transactions, as they use the US dollar and other hard currencies today. Or as the use of renminbi in Hong Kong, Macau, Indonesia and other parts of South East Asia has supported trade and development in these smaller economies.
For now, triangulating trades between the US dollar, the renminbi and different African currencies add risk and costs to imports and exports, especially when these are conducted across multiple African jurisdictions. An alternative is to consider pricing and settling in renminbi.
Standard Bank for example, is currently working with a large African retailer that has reduced its costs of landed goods from China by 8% by invoicing in renminbi.
So, while uptake of the renminbi in Africa-China trade as well as the use of the currency as reserve and alternate hard currency option in Africa has been slow, there is, increasingly, a strong rationale for governments, businesses and individuals in Africa – and for Chinese businesses dealing with Africa – to consider the use of renminbi on a project or individual transaction basis.
Richard de Roos is the head of foreign exchange for Standard Bank Group.