Thursday, 11 April 2013

China dilutes greenback's power in Africa

China dilutes greenback's power in Africa
Photo Credit:Reuters/Stringer Shanghai
Chinese-African trade may nearly double in three years from USD 198.5 billion in 2012 to USD 385 billion by 2015, and as much as 10% of the trade could be settled in Chinese yuan (CNY), according to Standard Chartered Bank.

China is flexing its financial muscle and leveraging its influence in the Sub-Saharan Africa region to raise the yuan's international profile and break the American dollar's grip on the global economy.

It has already had some success. Central banks in Angola, Nigeria and Tanzania are among the first in the region to hold some of their funds in the Chinese currency, while South African Reserve Bank recently announced it could invest up to USD 1.5 billion in dim sum bonds - so called because they are denominated in Chinese yuan and issued in Hong Kong. Kenya and Ghana are also reportedly keen to include CNY as part of their reserve currency portfolio.

In 2011 the Central Bank of Nigeria had pledged to hold around 10% of its foreign exchange reserves in the Chinese currency, while Nigeria and Tanzania also invested CNY 500 million in dim sum bonds from the China Development Bank.

The Chinese central bank hopes that in five years' time, as much as 20% of the African central bank foreign reserves could be in CNY.

"We see potential for African governments or corporates to issue dim sum bonds, although interest has been limited so far," Sarah Baynton-Glen, an analyst at Standard Chartered Bank, said in a report. "China's importance as a trading partner and source of finance will support further moves to include the CNY in African central bank reserves."

"The acceleration of economic growth in China, a pick-up in bilateral trade with Africa, and a deepening of local knowledge of CNY products in Africa will provide further impetus for rapid CNY regionalization in Africa."

China's role in Africa is increasingly being viewed with apprehension by Western states, especially at a time when austerity-driven OECD governments are unwilling to fund African projects and engage with African countries.

Western contact in the past few years has been focused on intervention in Mali and Libya and containing militant activities in Algeria, Egypt and Rwanda.

Meanwhile, China has been pouring funds into the region, building roads, infrastructure and injecting precious direct investment into mineral and energy resources.

"Dragon-slayers emphasize China's selfish quest for Africa's natural resources and how it sabotages international efforts to keep unpalatable African regimes in check," said Yun Sun, a visiting fellow at the Global Economy and Development, John L. Thornton China Center, Africa Growth Initiative, in a report for Brookings Institution.

"On the other hand, panda-huggers applaud China's contribution to Africa's economic development through infrastructure projects and revenue creation."

The truth is somewhere in between, where China is not entirely being altruist about its African engagement, but neither does it have a nefarious design to dupe African states.

Pinning hope on the renminbi
A number of factors suggest the Chinese yuan could become an important currency in Africa very soon.

African central banks, for example, would be keen to trade in CNY as there is a strong likelihood that the currency would eventually appreciate against the USD, thus increasing their foreign reserves.

As China's largest trading partner in SSA, South Africa is the most likely candidate to spearhead the CNY experiment. The Chinese have already discussed a USD 30 billion currency-swap agreement with its BRICS partners which includes South Africa.

"Given that China is South Africa's largest trading partner, we believe that 'reserve-ification' to include the CNY makes sense," said Standard Chartered Bank. "While the South African Reserve Bank was initially hesitant to include the CNY in reserves due to the non-convertibility of the CNY, the recent BRICS summit hosted by South Africa with talk also of pooling reserves appears to have highlighted the benefits of reserve diversification."

African governments and corporations are also keen to issue sovereign bonds, and while it has been primarily in euro or American dollars, the yuan may soon become part of the bond portfolio.

Last year, governments of Zambia, Angola and Kenya issued bonds, which were well-received, and they might be encouraged to issue dim sum bonds as they seek a new investor base and move away from the troubled Western investors who have lost their appetite for risk lately.

Although this would take some time to develop, the high-profile South African and Nigerian corporations may be the first to dip their toes in yuan waters.

'Long way to go'
The yuan still has a long way to go to compete with the American dollar.

SWIFT, the interbank financial service provider, notes that the CNY was the 21st biggest international currency in 2011, accounting for a mere 0.24% of global payments, even though the country accounts for 11.4% of global trade.

China has also had little luck in creating a yuan bloc in Asia, its biggest trading corridor.

"Is Asia becoming a 'yuan bloc'? Slowly, perhaps. But it is a long way from being there," said Michael Spencer, Deutsche Bank's Hong Kong-based analyst, arguing that the currency continues to be loosely pegged to the US dollar.

A fully convertible CNY by 2020, however, could transform the currency and its role in global trade.
"Growth in the global use of the CNY for settling cross-border trade has progressed rapidly since June 2010, with almost 15% of China's foreign trade transactions now denominated in the CNY. "In 2012, SWIFT CNY payments between China and Africa grew sevenfold to CNY 35.8 billion (USD 5.7 billion) from just CNY 5.2 billion (USD 750 million) in 2011.

With trade between the two regions set to double, expect more and more African countries and corporates carry yuan in their vaults.

Source: Zawyer

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