What Chinese Yuan as a reserve currency portends for Africa’s economy

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It is without doubt that China is an emerging superpower, a position currently occupied by the United States of America. China’s rising power, politically and economically is evident in all aspects of the global economy. China’s rising global stature has made her play a pivotal role in shaping the economic growth and development agenda of the world economy. This is clearly manifested in China’s own agenda in the Group of Twenty (G20), the International Monetary Fund (IMF) and the monetary and financial system, international trade and investment policies including those aimed at internationalization of the Chinese Yuan (basic unit of the renminbi – the official currency of the People’s Republic of China denoted as RMB).

China’s sustained economic growth has earned her both friends and foes in the global economic front. Previously rated the second largest economy in the world, the Chinese economy according to the IMF and the World Bank is now considered the world’s largest economy interms of Purchasing Power Parity (PPP) and the largest trading nation whose twin effect has been to raise the living standards of her people and alleviate poverty. Even though the Chinese economy has been at the epicenter of the success of the global economy in the last decade, there has been alot of hue and cry that China needs to occupy its rightful position on global affairs.

In October – just seven months after being re-elected in office as President, Xi Jinping was categorical that China must ‘take centre stage in the world’ by way of promoting globalization, boosting foreign trade and developing advanced technologies. Of great emphasis by ‘friends of China’ is the need for the largest-manufacturing economy and exporter-of-goods globally to take a leading role to ‘internationalize’ the renminbi. The call to internationalize the renminbi has brought into sharp focus the debate on the need for it to assume a greater global role either as a reserve currency or as a medium of exchange in international trade. These efforts took a turn to the good in 2016 when the yuan took a major step towards broader international adoption after the IMF decided to include it in the basket of currencies that make up the Special Drawing Right (SDR) – an alternative reserve asset to the U.S. dollar.

While the global economy took a ‘wait-and-see’ approach, African countries – most of whom have recently benefited immensely from Chinese grants and loans to build their infrastructure – welcomed the IMF gesture to adopt the yuan as a reserve currency. To them, it was a great idea whose time had come. The Sino-Africa relations have blossomed under President Xi Jinping and this can only take a positive trajectory in his new reign. In 2009, China surpassed the U.S. as Africa’s largest trade partner and as a result, African countries have benefitted immensely from Chinese loans and grants.

Africa has been on the forefront of evaluating the possibility of adopting the Chinese yuan as a reserve currency – a currency that a country holds in significant quantities as part of her foreign exchange reserves for use in international transactions, international investments and all aspects of the global economy. In the last decade, Africa has been partnering with China in exchange of goods, services and infrastructural development – a factor that greatly influenced the holding of a Macroeconomic and Financial Management Institute of Eastern Africa and Southern Africa (MEFMI) forum attended by 14 nations in Harare, Zimbabwe in May to discuss the possibility and viability of using the yuan as a reserve currency. The meeting attracted high-level participation from Africa’s Central Bank Chiefs, officials from African Development Bank and finance honchos from Africa’s ministries of finance. Countries represented in the meeting were: Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

The meeting was held at a time when the IMF’s data showed that the U.S. dollar’s share of currency reserves reported to the IMF fell in the first quarter of 2018 to a fresh four-year low, while the euro, yuan and sterling’s shares of reserves increased.The Sino-Africa growing trade relations with China have contributed greatly to the need to hold the currency reserves in yuan. China remains Africa’s foremost trading partner with trade between the two estimated to be USD 149.1 billion while Chinese companies’ investments in African economies stood at USD 3.2 billion in 2016. In Africa, over 10,000 Chinese companies have invested heavily in construction, manufacturing, services, mining, agriculture and infrastructure. Today, more than ever, the Chinese yuan is gaining global appellation as a legal tender.

For the African continent to be stronger as a trading bloc, it is inevitably important to adoptcompetitive global currencies away from the traditional reverence of the U.S. dollar, pound or the euro. China-Africa relations will flourish with the construction works of the Belt and Road Initiative envisaged to grow trade and to safeguardAfrica’s currency from unprecedented local currency volatilities.

So why should African countries adopt the Chinese yuan as a reserve currency? One, expanding China-Africa trade increases the yuan’s convertibility. 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 is meritorious as it allows conversion of local currencies to yuan without first having to convert to dollars thereby averting exchange losses in trade. On its own, this is a signal that the dollar as a major reserve currency has reached its optimum and its role as a global currency could be on the drain as that of the yuan rises.

Demetrius is what the booming China-Africa trade has made the yuan and as Africa gradually adopts the Chinese currency, the continent’s exports stand to gain value. Local firms stand a chance for increased prospects for better returns and when this hypothesis holds, there will be direct impact on building Africa’s human capital capacity by inspiring a generation of innovators who will be absorbed in the workforce of African nations’ economies.

By adopting the yuan as a reserve currency, African countries will be able to smoothly carry out international trade 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. Since Sino-Africa trade has grown in leaps and bounds, it is only prudent for African economies to hold their reserves in renminbi as opposed to the U.S dollar.  The other compelling reason for African countries to hold reserves in Chinese yuan is to help bridge the trade deficit that exists between the two trade blocs. Since the trade balance between China and Africa has widened over the last decade, it therefore requires the African nations to finance the trade by use of reserves in Chinese yuan rather than the U.S. dollar because of the diminishing trade relations between Africa and the West compared to the trade between Africa and China.

There has also been an increase in foreign debt between Africa and China away from their traditional partners led by the U.S. This has led to the need for debt settlements in Chinese yuan than U.S. dollars and as such there is need for African countries to modify their foreign currency portfolios in favour of the renminbi. With more loans expected from China to Africa, African countries will require more yuan to pay-off debts because most of these debts are yuan-denominated.

The now dynamic international trade has made the U.S. dollar lose its dominance in international trade currency and its convertibility to obtain major currency especially the yuan is reducing. There is the aspect of foreign earnings that is crucial to the stabilization of the macroeconomic environment in African economies. Since foreign earnings are in international currencies, there is need to convert those earnings into yuan to minimize transaction costs associated with converting the earnings into other foreign currencies before being converted into yuan to pay-off trade transactions and international obligations.

Despite the far-reaching benefits for the yuan as a reserve currency for African nations, there is still great concern that keeping it as such will make African economies highly dependent on it thus negating the gains made in doing away with the over-dependence on one currency for international transactions.

The use of the yuan will also make it vulnerable to manipulation especially if this will have an adverse effect on the global economy and moreso on the African economy. Lastly, there are fears that the yuan may lead to illiquidity for African nations especially due to inconvertibility since not all countries will adopt the yuan as an international currency for settling obligations between them.

The strength of the yuan is anchored in China’s stable governance system. As the European Union withers away with the Brexit, so will the euro but the Beijing Communist Party leadership provides attractive avenues for the yuan to thrive as a preferred global currency in the near future, in Africa and beyond.