October 2016: Future Chinese-African economic relations will see Africa leverage the renminbi as a global reserve and trading currency.
The rise of China as a global economic power has transformed Africa. The most convincing evidence of this is in the trade figures. In 2015 total trade between Africa and China reached USD149.8bn, up from USD28.8bn ten years earlier. Chinese domestic consumption has transformed Africa’s economies, urbanised its populations, increased employment, and improved health and skills. It has also seen the emergence of a growing and increasingly entrepreneurial middle class across the continent. The expansion and consumption of this middle class is set to sustain Africa’s growth narrative for generations to come.
China is working to restructure its domestic economy – away from commodity consumption-driven infrastructural and industrial development, towards a more mixed, skills-intensive economy, exporting services and technology. A consequence of this process is that the industrial production that fuelled China’s rise as a global economic force will be exported, much of this to Africa.
“Standard Bank’s partnership with the Industrial and Commercial Bank of China (ICBC), China’s largest bank, is critical to the future of both Africa and China, especially since Standard Bank is able to support Chinese trade and investment into Africa in renminbi,” says Rob Porter, Head of Global Markets Flow Sales at Standard Bank.
Standard Bank is already a dominant foreign currency player in Africa, “currently conducting 1.2 million trades annually,” says Mr Porter. US dollar flows from Africa to China amounted to USD200 billion in 2015 alone. “Converting these US dollar flows to renminbi – and then adding them to our already impressive trade volumes will establish Standard Bank as the dominant foreign currency provider on the continent,” he adds.
The benefits of operating in renminbi for Chinese businesses dealing with Africa speak for themselves:
- Allowing Chinese clients to use renminbi as their base currency will realise significant savings. For example, managing entire deal, trade and investment chains in renminbi will remove US dollar conversion costs and liquidity constraints, while also reducing local currency volatility risks.
- Settling trade deals in renminbi promotes price transparency and reduces the cost of international trade for Chinese clients. “This will also provide Africa access to a wider range of Chinese suppliers,” adds Craig Ebden Head of Global Markets China Sales at Standard Bank.
- Invoicing clients in renminbi, a cheaper currency than the US dollar, is not only easier for Chinese clients, but since the value of the renminbi more closely matches domestic African currencies conversion and volatility costs are reduced. This also holds advantages for African clients. For example, “African clothing retailers procuring stock from China prefer to receive invoices in renminbi – as this is the currency that the clothing is priced and sold in,” explains Mr Ebden.
- Since Chinese clients plan and earn in in renminbi, operating in renminbi, “provides a great deal of security, removing many of the risks that Chinese businesses often associate with Africa’s multi-currency US dollar denominated landscape,” says Mr Porter.
- Standard Bank’s renminbi capability provides Chinese retail treasurers, for example, with simple and economically viable renminbi solutions. This frees them to concentrate on the competition, market challenges, and detail of importing and exporting, “without worrying about US dollar conversion rates, currency fluctuation or liquidity risks for example,” he explains.
- Standard Bank’s partnership with ICBC assists in providing the financial infrastructure to manage Chinese industrial investment into the continent. For example, through the partnership, Standard Bank clients have access to ICBC’s cross-border Inter-bank payment system (CIPS). The agreement treats all Standard Bank renminbi payments as if they were ICBC transfers, automatically approved by China’s Central Bank. This significantly reduces the costs of renminbi payments while increasing the ease and speed of transfer by extending payment cut-off times and removing the need for interbank transfers, or any conversions.
Standard Bank’s deepening relationship with ICBC, along with being physically present in Beijing, “is teaching us a great deal about what it is that Chinese clients are looking for when they come to Africa – especially what platforms and technologies they expect to see in Africa,” says Mr Porter. Being present in Beijing has also allowed Standard Bank to observe, and capitalise on, a distinct change in the nature of Chinese-African business.
“Growing volumes of Chinese ‘flow’ deals associated with ongoing daily business transactions are increasingly replacing and eclipsing in value the big once-off investment deals that have characterised Chinese investment in Africa to date,” says Mr Ebden. “Beyond pointing to a more mature and established business and trade relationship between China and Africa, increased flow business is also seeing Standard Bank reap the rewards of building a solid, integrated local and global transaction capability on the ground across the continent.”
Despite the appeal of operating in renminbi for Chinese businesses in Africa, US dollars remain the currency of global commodity trade.” As Africa’s role in internationalising the renminbi deepens, the renminbi is likely to emerge as a global reserve currency, eventually even becoming a globally accepted commodity denominator,” says Mr Ebden.
Certainly, the renminbi’s trajectory is clear:
- In 2015, South Africa started the first renminbi clearing house in Africa aimed at speeding up transactions and reducing the need for US dollar settlement.
- In Zimbabwe, the renminbi has become legal tender in the country’s multi-currency regime along with eight other currencies.
- In July this year direct cash exchange was launched between China and Kenya.
- Late last year Angola and China signed an agreement allowing the reciprocal use of both countries’ currencies.
- Many African countries, including Nigeria and Ghana, include the renminbi in their foreign exchange reserves.
- The International Monetary fund (IMF) recently introduced the renminbi as its fifth reserve currency, alongside the US dollar, the euro, the Japanese yen and the British pound.
As China intensifies its renminbi internationalisation strategy and capital account liberalisation, the renminbi’s use as a global trade currency can only increase. Since China is Africa’s single largest trade partner, the internationalisation of the renminbi will certainly influence the way business is done in Africa. Equally, as Africa’s share of global trade grows, Africa will become increasingly important in the internationalisation of the renminbi – and a central pillar of China’s increasing geopolitical power.
These trends are already evident in the huge uptick recorded in renminbi-based trade payments since Standard Bank began its renminbi offering. “The next phase will see the renminbi increasingly denominate Chinese trade finance deals. The final phase will see investments structured in renminbi from inception to deployment as the renminbi emerges as a global reserve currency,” says Mr Porter.
