eBusiness Weekly
Tawanda Musarurwa
Last June, the European Central Bank (ECB) exchanged $611 million worth of United States dollar reserves into renminbi/yuan securities.
Considering the ECB held €44 billion in foreign exchange reserves at the time, the €500 million exchange was a small shift. The ECB’s foreign reserves now comprise US dollars, Japanese yen, Chinese renminbi, gold and SDRs.
What the shift did, however, was to clearly highlight China’s growing prominence in the global financial system, particularly as the International Monetary Fund (IMF) determined the renminbi to be a freely usable currency in its five-yearly review of the Special Drawing Right (SDR) Currency Basket in 2015. Since October 2016, the IMF approved the Chinese currency’s inclusion in the SDR basket as the fifth currency, alongside the US dollar, the euro, the Japanese yen and the British pound.
A year down the line from the ECB move, and two years following the IMF’s inclusion of the renminbi into its SDR Currency Basket, it appears there has been little significant effort by countries like Zimbabwe to grasp at this opportunity.
For Zimbabwe and other African economies to be “Johnny-come-latelies” to the use of the renminbi as a reserve currency is ironic in view if the fact that Sub Saharan Africa is one of China’s key trading partners.
Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) executive director and former governor of the Bank of Zambia Dr Caleb Fundanga told Business Weekly that it’s a “misnomer” that African countries have not jumped onto that ship.
“When you build up reserves you use them to make payments, so since African countries are doing more trade with the Chinese it is actually a misnomer that African countries have not been holding the renminbi in their reserves.
“They need to hold a significant portion of the Chinese currency to avoid exchange risks. In a positive development the Nigerian Central Bank recently swapped their currency with the renminbi,” said Dr Fundanga.
Africa’s compromised FX reserves
An analysis of the numbers of most countries in East and Southern Africa show that as at the end of last year, their official foreign currency reserves stood barely at or below the traditional three months of import cover benchmark.
This of particular concern in view of foreign currency denominated public debt in these economies, which continues to increase as well as interest payments, as most countries move to more commercial sources of borrowing to meet their increasing appetite for infrastructure projects.
According to MEFMI, debt sustainability has deteriorated in the region, and already the risk ratings for some of its member countries have worsened.
The institute has 14 member countries namely: Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.
The compromised state of the foreign currency reserves of most of these countries necessitates the respective authorities to consider including the renminbi in their reserves.
According to Slawomir Soroczynski, senior fund manager for Crown Agents Investment Management (CAIM) — a specialist fixed income and multi-asset manager for Central Banks, Pension Funds, and Sovereign Wealth Funds in Africa and the Caribbean — the renminbi is fundamentally strong firstly on the basis that the Chinese economy is too big to ignore, has strong fundamentals and its risks are manageable.
He adds that at market level, its fixed income market is too big to ignore, and third China has the largest foreign currency (FX) reserves in the world.
Reserve Bank of Zimbabwe (RBZ) governor Dr John Mangudya said this week that regional economies need to diversify their FX reserves from just being US dollar based.
“The bulk of reserves for most countries in the MEFMI region are invested in US dollars. Their composition though, has not kept pace with the large shifts in the world economy, particularly since China and India continue to shape global economic trends as they remain major trade partners for the MEFMI region.
“Most countries in the MEFMI region have loans or grants from China and it would only make economic sense to repay in renminbi.
“This is the reason why it is critical for policy makers to strategise on progress that the continent has made to embrace the Chinese RMB which has become what may be termed “common currency” in trade with Africa,’ said Dr Mangudya.
With China as the largest trading partner of over 130 countries, the main challenge for African countries is how to benefit from the new pattern of international commerce.
China is taking a lead in trade in Africa, the continent cannot afford to lag behind in taking advantage of growth-enhancing opportunities with China. It has been clear over the last five years that trade and investment with the West continues to be limited.
Africa must therefore participate in, and, identify economic and financial benefits that can be derived from the new reserves management patterns.
Nigeria takes a step forward in 2018
In May this year, Nigeria (Africa’s second largest economy) and China conducted a currency swap amounting to around $2, 4 billion, making trade between the two countries less reliant on the US dollar. In local currencies the deal was worth 15 billion renminbi or 720 billion naira, and is valid for three years and also renewable.
The deal made sense particularly because after the United States, China is Nigeria’s top trading partner. According to figures from the Observatory of Economic Complexity (OEC), China’s imports (mainly gas, oil and rough wood) reached $953 million in 2016.
The 2018 currency swap between Nigeria and China is not the first one between the latter and an African country. In 2015, the country signed a $4, 7 billion deal with South Africa.
Other African banks
In July 2012, a number of Central African apex banks were given access to yuan-denominated bonds by the China Development Bank Corporation (CDB).
The CDB, the State-owned lender and a supporter of government projects and Chinese companies looking to expand overseas, set aside part of its three-year dim sum bonds for African central banks.
At the time, the development marked the first time that African central banks were able to invest in yuan-denominated bonds.
It is believed that the central banks of Nigeria and Tanzania made the biggest purchase of the bonds among their African counterparts.
CDB offered 1 billion yuan ($157 million) of 20-year bonds in Hong Kong, the longest time on record for the market denominated by short-term debt, at a yield of 4,3 percent, and 1,5 billion yuan of three-year notes at a yield of 2,95 percent.
According to the CDB, 60 percent of the bonds were purchased by investors from Europe, the Middle East, and Africa.
As a matter of fact as early as 2000, China had established US dollar — renminbi swap lines with many Asian central banks under which China would provide US dollars in exchange for the local currency of the counterparty economy.
Starting 2009, the People’s Bank of China (PBoC) pushed to establish bilateral swap arrangements with other central banks in order to facilitate and expend the use of the renminbi in international trade and financial transactions.
“The exchange of swap lines is primarily for the purpose of promoting bilateral financial cooperation, facilitating bilateral trade and investment, and safeguarding regional financial stability,” explained the RBZ governor.
However, it is important to appreciate that a crucial difference between earlier swap arrangements and those entered into after 2009 is that the later swaps are in terms of local currencies (for example, the Nigeria-China one), that is, the PBoC commits to exchange other central banks’ currencies for renminbi (this could be one additional motivation for Zimbabwe to revive its own currency).
Meanwhile, official figures show that by September 2015, 34 central banks had signed these swap deals, with a total value of about $495, 8 billion (or 3, 16 trillion renminbi).
Although Zimbabwe added the renminbi to its basket of currencies in December 2016, it and certainly needs to do more as the growing influence of the Chinese currency is not dissipating anytime soon.
