Ever since it was announced last year that the renminbi was going to be included in the SDR basket starting October 1, 2016, there has been a large focus on how central banks are going to adapt to the RMB’s inclusion in terms of their foreign exchange reserves portfolio.
Needless to say, the excitement has not been lost on Africa. The Macroeconomic and Financial Management Institute of Eastern and South Africa (Mefmi), for example, held an event in Tanzania at the end of June to talk about the renminbi’s inclusion and how it will impact the central bank community in the region.
Mefmi is a regional institute created in 1994 to cover macroeconomic and financial management issues. It has 14 members comprising Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.
“The conference was very important because we realised a lot of our members don’t actually know what to expect or do with the renminbi,” said Caleb Fundanga, executive director, Mefmi.
The former governor of the Bank of Zambia told GlobalRMB that one of the main aims of the event was to encourage central banks in the region to put the renminbi into their reserves.
However, what the organisation realised was many of its members had no idea what renminbi assets were available to invest in, nor what sort of returns they could expect.
Perfect match
Chinese assets and African central banks are, on paper, a good combination.
That is because many African central banks are finding their investments in European investment grade corporate and financial bonds in negative yield territory at the moment. Chinese 10 year government bonds, on the other hand, were yielding about 2.78% on the morning of August 9.
“It’s actually a good deal to start looking at Chinese assets because a lot of African central banks tend to invest in a lot of European assets,” Fundanga said. “It makes a lot of sense for them to start looking at other high quality assets that give better returns.”
That said, not all African countries have been slow to understand the perks of having the renminbi as part of their reserves.
Nigeria, for example, was the first African nation to include the renminbi in its reserves with a 5% allocation back in 2011. Since then, other countries including Ghana, South Africa, Tanzania and Zimbabwe have followed suit.
Still, the number of African countries that have chosen to allocate to renminbi remains small. And part of the reason for the lack of take up was down to the restricted access to China’s domestic markets in the form of investment quotas.
However, those restrictions were lifted in July 2015 and foreign central banks are now able to invest freely in China’s interbank market via bond repo transactions, bond lending, bond forwards, interest rate swaps (IRS) and forward rate agreements (FRAs), in addition to spot trades.
“They are basically able to invest freely in China’s domestic market as if they were a local investor,” one Hong Kong based China economist said. “The only thing that is really stopping them is their lack of co-ordination and conviction.”
Natural choice
It is more or less the same story in terms of promoting the renminbi as a trade currency in Africa. China has been the continent’s largest trading partner since 2009 with volumes of $200bn in 2015, according to China Customs data.
Beijing imports over one-third of its energy requirements from the continent as well as a myriad of commodities and raw materials. And Africa is also the main recipient of Chinese exports such as electrical appliances and textiles.
If that is not enough, China overtook the US in 2015 as the largest source of foreign direct investment into Africa ($128bn), according to UN Comtrade data.
“Africa really is the obvious choice for China to broaden its currency’s reach given the fantastic diplomatic ties and huge commercial links between the two sides,” said Jeremy Stevens, chief China economist at Standard Bank.
When Nigeria first made the move to include the RMB into its reserves, Stevens thought it would only be a matter of time before the rest of the continent would follow suit. His estimate back then was that one-third of all trade between Africa and China would soon be denominated in renminbi. But the volume is thought to be far from that target though no official figures exist.
Such a move would have certainly made a lot of financial sense compared to how most transactions are being executed right now, which is through an intermediary currency such as US dollars.
“It makes perfect sense for corporates which are already dealing with China to execute in RMB as there’s less FX risks, better price discovery and faster invoicing,” Stevens said. “But that hasn’t really taken off although some African countries such as South Africa, Kenya and Zambia have been more active than others.”
Both South Africa and Zambia are hosts to officially designated RMB clearing banks while Kenya is also facilitating payments through the National Bank of Kenya.
Moving things on
Stevens agrees that one of the biggest issues is the lack of co-ordination even though interest is there to improve the usage of the renminbi in Africa.
“China wants to engage but most of the times Africa is simply not coming up with the initiatives or projects,” he added. “Other initiatives such as fast tracking of invoices and direct dealing platforms have also been talked about for a long time.”
Mefmi’s Fundanga admitted that Africa really ought to have started making a push for the renminbi internationalisation process earlier.
“One of the conclusions we got from the conference was we really should have started looking at the renminbi both as a reserve currency as well as a payment currency a long time ago,” he said.
In a bid to improve the situation, Mefmi will be holding a meeting in Hong Kong on November 22 for the various heads of Reserves Management and Payments Systems under its membership.
The aim of the event is to get to know more about what RMB products are available and who they can actually transact with.
While many international banks and even some Chinese banks do have branches and manpower in Africa, Fundanga argued that the rationale behind travelling to Hong Kong is to meet with renminbi specialists, many of which are based in the city.
Another reason why Hong Kong makes sense is because they are also keen on establishing relationships with Chinese banks, identifying potential partners and convincing them to set up shop in Africa.
“One of our biggest issues is simply the Chinese banks are not here, so no one is telling African central banks or companies about the RMB or what to do with the currency,” Fundanga said.
“Africa can be a very attractive destination because we are in the centre of the new growth globally. By coming here, they would also be able to better serve their own domestic clients in China, which are increasingly migrating to the continent and setting up manufacturing bases here.”