In global trade corridors, the renminbi (RMB) is maturing, albeit with some teething issues as it evolves from an emerging-market currency to a fundamental global reserve.
In 2016, policymakers in China pivoted towards an agenda of economic stability, inadvertently allowing the RMB internationalisation project to find its own feet for the first time. According to SWIFT data from March 2018, the RMB is the sixth-most active currency for domestic and cross-border payments, trailing the Canadian dollar.
But the data also shows that the RMB accounted for only 1.62 per cent of domestic and cross-border payments in that period. Furthermore, despite more than 10 per cent of payments from Africa ending up in China, the use of the RMB remains low, at only 0.1 per cent of all payments. Fluctuations in foreign exchange (FX) and a resurgence of the more traditionally used currencies means that RMB volumes unilaterally decreased across both payments and trade finance globally in 2017.
"The number of inter-bank relationships between China and Africa has increased from 20 in 2008 to 186 in 2017"
In some quarters, questions are being asked about whether figures like these mark the end of the rapid growth of RMB adoption. We don’t believe they do. Stabilising volumes are not likely to dent the RMB’s long-term broader appeal, especially in Africa where its trajectory from peripheral to mainstream trade currency is particularly conspicuous.
Belt and Road boost
China’s Belt and Road initiative (OBOR) is expected to expedite cross-border investments, and will play an important role in promoting the RMB’s internationalisation. Long-term commitments – such as a Chinese-led railway project in Kenya, and the 600-megawatt Karuma Hydroelectric Power Station under construction in Uganda – will generate demand for the currency and act as drivers to facilitate RMB usage.
With OBOR fostering financial cooperation and trade in Africa, it makes economic sense for countries along the modern ‘Silk Road’ to use the Chinese currency. Using the RMB to pay back loans or grants received from China lowers exchange rate risk and reduces the cost of cross-trade investment.
The deepening trade relationship between China and Africa clearly points to a longer-term story in which the RMB 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. At the same time, Chinese companies and banks are using the RMB to trade with an increasing number of African countries.
Ghana, Nigeria, Mauritius and Zimbabwe use the RMB for payments and reserves, for instance, and the Nigeria’s central bank has 10 per cent of its foreign reserves in RMB. With an expected redound in China and sub-Saharan Africa trade in 2018, we remain very confident in the RMB’s future in Africa.
With the right support, the currency will develop more meaningfully.
The renminbi’s next chapter
Several important factors will need to align to facilitate the RMB’s next growth phase in Africa. First, increased RMB usage in African trade finance will need to be further supported by central banks to ensure continual traction. Encouragingly, numerous central banks across the continent are now using the RMB as a reserve currency and many others have indicated their plans to expand their holdings. This trend is not only providing an incentive for African corporations to invoice more trade in RMB, but also demonstrates to the market that confidence in China’s currency is increasing at an institutional level.
Second, for volumes to stabilise in Africa and for corporations to take advantage of a maturing trade currency, the RMB will need to be used more strategically. Widespread adoption of the currency in Africa will not be a one-size-fits-all approach. However, broader adoption of the RMB will have greater potential to occur when foreign exchange markets develop further in Africa and RMB pioneers gradually transition its usage from an export currency to a supply chain constituent. Furthermore, the availability of more hedging solutions and specialist RMB expertise should promote more strategic usage.
Third, for RMB adoption to take its next step in Africa, it is essential for more knowledge to be shared with corporates. A sustainable platform across the continent would help build better understanding of the RMB, and potentially increase the dissemination of specialist risk management knowledge.
To address these challenges, Africa will need to create an RMB ecosystem to facilitate the next phase of trade finance across the continent. This will not happen overnight, and will require substantial domestic bank involvement and expertise from foreign players to succeed.