Renminbi: Africa’s long-term trading currency?
By Philip Panaino, Regional Head,Transaction BankingAfrica & Middle East, Standard Chartered Bank
In June 2018, SWIFT published a white paper on Africa’s transaction flows. Using SWIFT data, we’ve mapped trade flows against financial flows, revealing a unique perspective on Africa’s transaction patterns. We look at how transaction banking has changed in Africa over the last five years and identify potential drivers for change and their impact on banks doing business in Africa.
We also spoke to industry leaders in Africa to hear their thoughts on the future of banking on the continent. Here, Philip Panaino, Regional Head of Transaction Banking for Africa & Middle East at Standard Chartered Bank, talks about China’s renminbi and its role in Africa.
China’s renminbi is rapidly developing as an international currency. Within global trade corridors, the renminbi is maturing, albeit while experiencing some teething issues. However, with fluctuations in foreign exchange movements and resurgence in more traditionally used currencies, renminbi volumes unilaterally retreated across both payments and trade finance globally in 2017. Unsurprisingly, volumes in Africa have followed global trends.
China’s Belt and Road initiative is expected to expedite cross-border investments, and will play an important role in promoting the internationalisation of the renminbi. In Africa, long term commitments such as the Chinese-led railway project in Kenya and the 600-megawatt Karuma Hydroelectric Power Station, currently under construction in Uganda, will generate demand for the currency and act as drivers to facilitate Renminbi usage. As the Belt and Road initiative continues to foster financial cooperation and trade in Africa, it makes economic sense for countries along the modern ‘Silk Road’ to use the Chinese currency.
A strategic currency
In 2016, policymakers in China pivoted towards an agenda of economic stability, inadvertently allowing the renminbi internationalisation project to find its own feet for the first time. According to SWIFT data from March 2018, the Renminbi is the sixth most active currency for domestic and cross-border payments, trailing the Canadian Dollar. However, the renminbi’s share for payments still accounts for only 1.62% of domestic and cross-border payments. Furthermore, data within this paper states that, despite more than 10% of payments from Africa ending up in China, the use of the renminbi remains low with only 0.1% of all payments.
Some are questioning whether recent events mark the end of the renminbi’s rapid growth or whether the currency’s place internationally is entering a phase of more strategic usage. In the context of the deepening trade relationship between China and Africa, it clearly points to a longer-term story whereby the renminbi will play a more strategic role in facilitating cross-border trade. According to SWIFT data, the number of inter-bank relationships between China and Africa has increased substantially from 20 in 2008 to 186 in 2017. In parallel, Chinese companies and banks are using the renminbi in trade with an increasing number of African countries and a number of those nations have included it in their baskets of currencies.
Ghana, Nigeria, Mauritius and Zimbabwe use the renminbi for payments and reserves, for instance, and the Nigerian central bank has 10% of its foreign reserves in the renminbi. With an expected rebound in China and Sub-Saharan Africa trade in 2018, we remain very confident in the renminbi’s usage and future in Africa; with the right support the currency will develop more meaningfully.
The next chapter
Several important factors will need to align to facilitate the renminbi’s next growth phase in Africa.
Firstly, the increased use of the renminbi in African trade finance will need to be further supported by central banks to ensure continual traction. Numerous central banks across the continent are now using the renminbi as a reserve currency and many others have indicated their plans to expand their renminbi holdings.
This trend provides an incentive to African corporations to invoice more trade in renminbi and demonstrates to the market that confidence in China’s currency is increasing at an institutional level. As more favourable exchange rates and payment terms with Chinese counterparties become a reality for African corporations, we also expect to see increased liquidity and renminbi-based use.
Secondly, for volumes to stabilise in Africa and for corporations to take advantage of a maturing trade currency, the renminbi will need to be used more strategically. In our view, widespread adoption of the currency in Africa will not be a one-size fits all approach.
However, broader adoption of the renminbi will have greater potential to occur when FX markets develop further in Africa and renminbi pioneers gradually transition its usage from an export currency to a supply chain constituent. Furthermore, the development of more hedging solutions and broader in-house and third party renminbi expertise available to African corporations and banks will also promote more strategic usage.
Thirdly, it is essential for more knowledge to be shared with corporates. Providing a sustainable platform across the continent to ensure better understanding of the major renminbi considerations for corporates will be a vital step in this larger process. In this context, we see scope for the expansion of the risk management knowledge required to use a developing global currency.
To address these challenges, Africa will ultimately need to create a renminbi ecosystem to facilitate the next phase of trade finance across the continent. This will not happen overnight but will instead require both substantial domestic bank involvement and expertise from foreign players to succeed.