Why Africa needs to adopt China yuan as reserve cash

It is without doubt that China is an emerging superpower. China’s rising political and economic power is evident in all aspects of the global economy. It’s playing a critical role in shaping the world’s development agenda.

This is manifested in China’s own agenda in G20, the International Monetary Fund (IMF) and the monetary and financial system, international trade and investment policies including those policies aimed at internationalisation of the Chinese yuan — renminbi — its official currency.

Previously rated the second largest economy in the world by the Bretton Woods institutions, the Chinese economy is currently surging to the apex of the world economy.

The Chinese growing influence and the increase in Sino-African relations has brought to the fore a debate on the African countries’ need to adopt the renminbi as a reserve currency – a currency that a country holds in significant quantities as part of their foreign exchange reserves for use in international transactions and investments.

China has made a very conscious and well-thought-through choice. How? Two years ago — just seven months after being re-elected into office as President — Xi Jinping quipped, “China must take centre stage in the world through promoting globalisation, boosting foreign trade, developing advanced technologies and ‘internationalising’ the renminbi.”

The call to internationalise the renminbi continues to reverberate across the world. African countries are mulling the need to use the renminbi as a reserve currency and a medium of exchange in international settlements.

Efforts to internationalise the yuan took a turn to the good in 2016 when it joined the IMF basket of reserve currencies alongside others — such as the U.S dollar, euro, yen and British pound — which determines currencies that countries can receive as part of loans offered by the IMF.

The yuan then became part of the global currencies that make up the Special Drawing Right (SDR) – an alternative reserve asset to the U.S. dollar. At the time, the yuan made history by being the first new currency to be added in that category since the euro went into use in 1999.

While some economies in the global economy took a wait-and-see approach, African countries with near-unfettered access to Chinese grants and loans to build their infrastructure welcomed the IMF gesture of adopting the yuan as a reserve currency.

But what does the adoption of yuan as a reserve currency mean for Africa? The answer lies in two key aspects of China-Africa relations: trade and debt.

The Sino-African trade has grown significantly over the years to a high of Sh21.9 trillion in 2014 while Africa’s loan owed to China is estimated at Sh11.6 trillion. Chinese companies’ investments in African economies stood at Sh326 billion in 2016.

Premised on the increased trade, loans and grants to Africa from China, there has been incessant debate in Africa that time is nigh for African countries to adopt the yuan as a reserve currency. So what benefits will accrue to African countries adopting the yuan as a reserve currency? The growing China-Africa trade has increased the yuan’s convertibility in settling financial transactions between countries.

Already, some African countries such as Angola and Zimbabwe have adopted the yuan as their reserve currency. Nigeria, which is Africa’s biggest economy, has nearly 10 percent of its reserves in renminbi. This allows for easier conversion of local currencies to yuan without first having to convert to dollars thereby averting potential exchange losses in trade.

By adopting the yuan as a reserve currency, African countries will trade smoothly at both bilateral and multilateral levels because it will be easier to make international transactions between many countries that require diverse currencies for financial settlements.

The yuan will also partly assist in bridging the trade deficit that exists between China and Africa. Since the trade balance between China and Africa has widened, it behoves African nations to finance the trade by use of reserves in yuan than any other currency because of the diminishing trade volumes between Africa and the other blocs.

The yuan will be useful in debt settlements as there is need for African countries to modify their foreign currency portfolios in favour of the renminbi since most of these debts are yuan-denominated.

The yuan is crucial in stabilising the macroeconomic environment in Africa.

Since foreign earnings are in international currencies, there is need to convert those earnings into yuan to minimise transactional costs associated with converting the earnings into other foreign currencies before being converted into yuan to pay off trade transactions and international obligations.

Africa cannot afford to play catch-up. The ball is firmly in the court of African central bankers.

The writer is an economist and commentator on trade and investment.