Friday, October 28, 2011

The development of Renminbi in Africa

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.

8 comments:

  1. China’s moving pretty fast to internationalise its currency, actually much faster than expected.

    Nigeria’s punt on the renminbi is indeed a case study. Converting 10% of its national currency reserves to CNY as you mentioned - The move to Renminbi for Nigeria is evincive given that it is Africa’s 3rd largest economy and its main export – oil – is dollar-denominated.

    Besides there’s significant Chinatown in Lagos, the economic and financial capital of Nigeria, that sell Chinese consumer goods, imports & products manufactured by Chinese firms in Nigeria.

    I guess for the Nigerians, it’ll be kind of living in their wildest dreams to overlook China at the moment. It’s the world’s 2nd largest economy & it has a stable regional currency system.

    Nigeria’s case study will definitely be a good one to watch. Though Nigeria is not the first to dip its toes into the renminbi reserve waters, we saw economies from Iceland to South Korea which already hold renminbi as part their reserves and this has been made possible all thanks to a chain of bilateral currency swaps.

    The renminbi internationalisation boat may not be a swift one at the moment but it looks like no one wants to miss it.

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  2. Further to the article by Randolf Chen of the Bank of China, I cannot agree with him more. While the internationalisation process of the yuan is likely to take time, I believe the process in Africa and especially South Africa should be speeded up. The total trade between South Africa and China in 2010 amounted to approximately R143 billion while the total trade between China and the African continent was in the region of R700 billion. China is now South Africa’s main trading partner, whereas in 2010 10% of all exports went to China while 14% of all South African imports were from China.

    One significant factor influencing African economies is currency movements. Due to the fact that countries on the continent are regarded as developing or emerging economies their currencies are on the receiving end when it comes to the risk appetite of global investors. During prosperous times funds find their way into emerging economies thanks to higher interest rates than in the developed economies. Added to that is the fact that most of the emerging economies are highly dependent on commodity exports and portfolio investments are directed to those emerging economies as growth prospects are high and country risks lower. The influx of such short-term capital has a major impact on the emerging economies, though.

    The manufacturing sectors of the emerging economies are hard hit by the strength of the local currencies, resulting in these sectors being priced out of the market. On the other hand the services or non-manufacturing sectors experience a boom as the local prices of imported products drop sharply. The central banks in the emerging economies are aware of the fickleness of the short-term capital inflows and are afraid to ease monetary policy aggressively. The end result is that very few jobs are created. However, when the tide turns and hard times approach the global economy, the short-term capital abruptly leaves the emerging economies. Again the emerging economies are on the receiving end. When their currencies fall in a heap against the hard currencies, the prices and volumes of their commodity exports fall as well. Worst of it all is that import prices rise as a result of the fall in the value of the emerging economies’ currencies. Economic growth is therefore impeded again.

    Although one should not yet talk of the yuan as global reserve currency, I believe emerging economies with significant trade with China should seriously consider not only adding yuan to their reserves but also starting to peg their currencies against the yuan. At least the central bankers in the emerging economies will be able to plan their economies on a balanced basis – balanced in the sense of creating jobs and prospering – and be less susceptible to fickle portfolio flows of global capital. At least these central bankers will know their currencies will be linked to the currency of perhaps the strongest, fastest-growing and least indebted major economy in the world. Such a step would go a long way to create economic stability and growth on especially the African continent.

    Investors in emerging economies such as South Africa should also be allowed and encouraged to diversify their savings by investing in and through the yuan. At least they will be receiving six times more in interest than when investing in volatile hard currencies.

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  3. The key here is `toward 2025'. Even the most ardent supporters of making the Renminbi a floating Currency as soon as possible believe it will be by 2025. The Renminbi has appreciated about 3.5% a year since the peg was removed in 7/05, if it continues to appreciate at that rate for the next 14 years I'm guessing it will be trading were it's supposed to be vs. the dollar.

    Posted by: Scott M. Webb: Owner, Autonomous Solar
    Source: LinkedIn Questions & Answers

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  4. Is China going to make the RMB tradable only between Africa and China? That would make Africa a wholesale economic colony of China.

    Posted by: Greg Majersky: Consultant, Water and Energy, at Gerson Lehrman Group
    Source: LinkedIn Group - The Economist Newspaper readers

    ReplyDelete
  5. I think that it is the good start for the Renminbi to become more involved in the third countries.

    Posted by: Nay Lin M: Student at the Silicon Valley
    Source: LinkedIn Questions & Answers

    ReplyDelete
  6. I can't help but think about the time the Euro was introduced and virtually the same things were said back then.

    The major difference here is that we have one country (China) with global ambitions that in time may see it challenge the dominance of the USD in international currency benchmarking.

    However, I would exercise caution on rushing into that view as there remains significant political and idealogical storm fronts that will come together to cause a lot of instability in China's currency's ambitions.

    Asia (specifically India and China) are the growth engines for GLOBAL economic prosperity and watch how the US Govt will position itself to ensure in doesn't miss out on the benefits of these two economic engines going into hyperdrive.

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  7. I think Africa can drive much better terms of trade with China by pricing in RMB. China wants to internationalize the currency so Africa has the relative influence here by taking the lead I would think. By saying that use of a currency makes one a colony, we would say the whole world is an economic colony of the US. Is that really the case?

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  8. Kunaal BeenessreesinghNovember 23, 2011 at 11:40 PM

    I think that some are way too optimistic about the Yuan's chance of competing with the US Dollar. The fundamental determinants of iternational currency status are confidence in the currency, economic size and depth of financial markets. Observers have been underestimating the significance of the latter. In theory, the central government could move towards this goal by accepting an open capital account, float the yuan and remove their not so invisible hand from the process of capital allocation. I feel China will be reluctant to pursue such a policy and let their currency appreciate. The Renminbi will not come close to the Dollar for a long time.

    If History is of any use, the internationalisation of the USD, the Deutsche Mark and the Yen happened unintentionally with no clear national policy on the subject due to a lack of popular interest. China is clearly setting a precedent.

    For the bear that I am on China, I would contend a recapitalisation of their banks(who still hold bonds of so called asset management firms set up in 1999 and 2004 following an upsurge in non performing loans) will be on the cards soon(2-4 yrs). The system will be flooded with RMB and the rest will be history.

    ReplyDelete