AfrAsia Bank is pleased to post the following from guest blogger Randolf Chen. Randolf is from a reputed Financial Marketing Department and here outlines the development of Renminbi in Africa.
The Chinese Yuan (short name CNY, also known as CNY) is getting more and more important place in the world to compete with US dollar, and is becoming one of the main trade settlement currencies between China and Africa.
With reference to the report issued by Standard Bank in September, the CNY internationalisation process is growing steadily, and at least the 40% (about 100 billion USD) of total trade volume between China and South Africa will use CNY as settlement currency toward 2025. This amount is almost near the total trade volume between China and Africa in 2010.
The CNY internationalisation will help China to improve its own efficiency and elasticity of trade and investment flows, and also create a more flexible and free financial environment. However, it takes time for the process to be finalised. CNY trading in the global foreign exchange market currently is only accounting for 3% in total trade volume. There will be a long process to internationalise CNY completely, but unlike USD which took 50 years for to be internationalised, the CNY speed should be faster than expectation. By comparison to other continents, Africa will be the fastest growing region in terms of CNY trade. One good example would be Nigeria who has recently announced to convert 10% of national currency reserves into CNY. We believe more African countries will soon to join. In addition, one of benefits of CNY internationalisation for both Chinese enterprises as well as Africa itself is to decrease the financing and transaction costs for importers and exporters substantially. It is understandable that African enterprises have been dealing USD as trade settlement for a long period of time. Therefore, it is necessary to explain the benefits of using CNY to make settlement instead. On one hand, there is a better discount to use CNY making settlement of the import price for African business. On the other hand, Chinese enterprises can now avoid the foreign exchange risks and enjoy the benefit of export tax rebate faster in local China.
From the technical analysis perspective, the CNY has strengthened against USD since 2010 by 7%, appreciated from 6.83 to currently trading at 6.375. Accounting for the China’s economic growth in comparison to global economic status, the 1 year prediction for USD against CNY is said to be looking at 6.20 level.