Prevalence Of Renminbi: Africa’s Growth Driving Emergence Of China’s Currency

The ongoing rise of China continues to transform Africa.

Future Chinese-African economic relations will see Africa leverage the renminbi as a global reserve and trading currency. More and more, trade data supports this–in 2015 total trade between Africa and China reached USD149.8bn, up from USD28.8bn a decade earlier. In addition, Chinese domestic consumption has transformed Africa’s economies and urbanized its populations. An increase in employment has also occurred.

Sub-Saharan Africa has also seen the steady emergence of a growing and increasingly entrepreneurial middle class across the continent. The expansion and consumption of this middle class are set to sustain Africa’s growth narrative for generations to come.

China, meanwhile, is working to restructure its domestic economy away from commodity consumption-driven infrastructural and industrial development, towards a more mixed and skills-intensive economy–exporting services and technology are two examples.

A consequence of this process is that the industrial production that fueled China’s rise as a global economic force will be exported, much of this to Africa.

Africa’s largest bank by assets, Standard Bank, has forged relationships with China and today holds partnerships in the country.

“Standard Bank’s partnership with the Industrial and Commercial Bank of China (ICBC), China’s largest bank, is critical to the future of both Africa and China, especially since Standard Bank is able to support Chinese trade and investment into Africa in renminbi,” says Rob Porter, head of global markets flow sales at Standard Bank.

Standard Bank is also a dominant foreign currency player in Africa, “currently conducting 1.2 million trades annually,” says Porter. US dollar flows from Africa to China amounted to USD200 billion in 2015 alone. “Converting these US dollar flows to renminbi – and then adding them to our already impressive trade volumes will establish Standard Bank as the dominant foreign currency provider on the continent.”

Benefits Of Renminbi

The benefits of operating in renminbi for Chinese businesses dealing with Africa speak for themselves says Standard Bank.

Allowing Chinese clients to use the renminbi as their base currency will produce significant savings. For example, managing the entire deal, trade and investment chains in renminbi will remove US dollar conversion costs and liquidity constraints, while also reducing local currency volatility risks.

Settling trade deals in the renminbi promotes price transparency and reduces the cost of international trade for Chinese clients. “This will also provide Africa access to a wider range of Chinese suppliers,” Craig Ebden head of global markets China sales at Standard Bank, said. In addition, invoicing clients in renminbi, a cheaper currency than the US dollar is not only easier for Chinese clients, but since the value of the renminbi more closely matches domestic African currencies conversion and volatility costs are reduced. This also holds advantages for African clients. For example, “African clothing retailers procuring stock from China prefer to receive invoices in renminbi – as this is the currency that the clothing is priced and sold in,” explains Mr. Ebden.

Standard Bank’s partnership with ICBC works to provide the financial infrastructure needed to manage Chinese industrial investment into the continent. For example, through the partnership, Standard Bank clients have access to ICBC’s cross-border Inter-bank payment system (CIPS).

The agreement treats all Standard Bank renminbi payments as if they were ICBC transfers, automatically approved by China’s Central Bank. This significantly reduces the costs of renminbi payments while increasing the ease and speed of transfer by extending payment cut-off times and removing the need for interbank transfers, or any conversions.

These trends are already evident in the huge uptick recorded in renminbi-based trade payments since Standard Bank began its renminbi offering. “The next phase will see the renminbi increasingly denominate Chinese trade finance deals. The final phase will see investments structured in renminbi from inception to deployment as the renminbi emerges as a global reserve currency,” Porter said.