Currency on the right course

Renminbi could do with an African stopover in its globalization push

When Zheng He, the greatest navigator in Chinese history, visited Africa some 600 years ago, he used gold and silver to trade with local residents.

Trade settlements in Africa are no longer conducted with gold and silver. In the current era, several global currencies have held sway in Africa over varied periods of time. With the Chinese renminbi set to become one of the trade settlement currencies in Africa, the wheel has indeed turned a full circle.

For the renminbi itself, it has been a tumultuous journey. Cross-border trading in renminbi began in 2003 when Beijing allowed it to be used for trade settlements in Hong Kong. Globalization of renminbi gathered further momentum during the 2008-09 financial crisis, when Chinese policymakers realized that the heavy reliance on the US dollar as a global reserve and settlement currency had triggered the crisis.

Those first steps toward renminbi globalization seem to have paid off.

In 2010, only 3 percent of China's foreign trade was settled in renminbi. Last year that had risen to over 12 percent. The Chinese currency was ranked 13th among all global currencies in terms of popularity.

In the past few years, there have been efforts to further popularize the Chinese currency in Southeast Asia, Europe and the Middle East. However, Africa seemed to be lagging behind in the use of renminbi because of its weak economic and financial strengths.

That needs to change and China should push for more renminbi use in Africa, rather than internationalization. There are several reasons for this.

Africa is politically friendly to China and the Chinese currency. Such feelings automatically pave the way for the renminbi's smooth entry in Africa.

One of the preconditions for a currency to be truly global is that it should not pose a threat to the local currency. It is also equally important for it to be favored by local governments and users. Renminbi more than fits the bill in both these regards in Africa.

In the United States renminbi's popularity is much lower than in the Europe. That is, in a large part, because the US does not want renminbi to upset the greenback's status as a global reserve and settlement currency. That also explains why New York, which boasts of the world's freest and most advanced monetary market, is not an offshore renminbi trading center.

However, Africa has been increasingly responsive to China and Chinese businesses. Although there have been some instances where Chinese companies have been criticized for failing to adhere to corporate social responsibility norms, by and large China's image in Africa is good.

China has helped build infrastructure in Africa, while some private companies like ZTE Corp and Huawei Technologies have worked hard to build up China's image as a quality service and goods provider. Due to the long-standing trust, renminbi will not face too many obstacles in Africa.

Trade between China and Africa has been growing fast and there is still huge potential for both sides to make substantial gains.

To promote the use of renminbi in a foreign country, trade is always the starting point. Only when the trade volume reaches a certain level can renminbi be used for imports and exports. (Given the strength of renminbi and the high expectations for its appreciation, it is highly likely that it would be used whenever China exports goods.)

Last year, China-Africa trade amounted to $198.4 billion (154.3 billion euros), and China is Africa's largest trade partner. Goods form the bulk of the two-way trade. This also creates a solid platform for renminbi to be used in settling trade deals, as goods trade is usually much easier to be settled than the services trade.

However, the use of renminbi in Africa is still small. Last year, renminbi settlements accounted for just 0.5 percent, or $1 billion, of trade transactions between China and Africa. But with the huge trade base, renminbi settlement can be easily boosted, as we have seen in the rapidly growing use of renminbi in China's trade with other countries.

A Standard Chartered Bank report has predicted that settlements in renjminbi in China-Africa trade can rise to $15 billion by 2015. By then, renminbi use will account for 4.3 percent of the total China-Africa trade, based on the prediction that the trade will grow at an annual pace of 20 percent.

It is believed that a region where 5 percent of the trade with China is settled in renminbi can become an offshore renminbi-trading center. If everything goes smoothly, Africa will meet the standards of having such a center in 2016.

The Chinese currency, as a reserve currency, does have a market in Africa. Some African central banks have recently purchased several renminbi-denominated bonds. Last year African countries, led by Nigeria and Tanzania, bought 500 million renminbi of bonds issued by the China Development Bank.

That means these countries have put renminbi into their reserve currency baskets and shows African countries' confidence in, renminbi.

At the same time it is also important for China to promote use of renminbi in Africa. Four approaches can be considered:

1. China can use renminbi when it offers aid to African countries.

China constantly provides aid and loans to several African nations. President Xi Jinping, during his recent visit to Africa, vowed to offer loans worth up to $20 billion to Africa in three years.

It is possible that part of the loans can be in renminbi, a move that will greatly help promote the currency. Loan recipients can easily exchange renminbi at foreign exchange markets or sell them at a good rate to traders who do businesses with China.

2. China should expand currency swap programs with Africa. However, priority in such exchanges must be accorded to African countries that have huge trade bases.

3. The establishment of offshore renminbi centers serving Africa should be accelerated.

Offshore renminbi trading centers have already been established in Southeast Asia, with Hong Kong, Taiwan and Singapore being allowed to settle and clear renminbi transactions locally.

In Europe, London has already been a de facto offshore renminbi center. The only thing it lacks is a clearing bank appointed by China. But the establishment of such a clearing bank seems to be only a matter of time.

However, Africa does not have such a renminbi center. Given the political and cultural differences among African nations, two such centers need to be set up to serve Africa.

Dubai can be a center that can serve the Middle East and North Africa. Mauritius or Johannesburg can be another center to serve central and southern parts of Africa. Of the three places, Dubai may be the first center to be established thanks to its free exchange policies and renminbi's tremendous popularity.

Although Johannesburg is not as active as Mauritius in using renminbi, South Africa's economic clout in the continent and the country's close ties with China can help Johannesburg steal a march over Mauritius in the competition to become an offshore renminbi center.

4. African investors should be encouraged to invest in China with offshore renminbi. Currently only Hong Kong investors are allowed to do so. The slow pace of opening up investment in China stems from the volatility fears associated with the huge influx of offshore renminbi.

However, it seems prudent to consider relaxing the norms for African investors, as it would not lead to huge inflows. This is because African investment in China is slight and the amount of offshore renminbi African investors can hold is also not that high. This means China can well fend off a renminbi influx from Africa.

Of course, renminbi's road in Africa will not be smooth because of the region's political instability, loose economic integration and weak financial systems. But with its huge potential, it is more likely that renminbi's popularity in Africa can be greater than in the United States and South America.

The author is marketing director of RMG selection, a UK headhunting company based in China.