Article written

  • on 13.07.2015
  • at 05:15 PM
  • by Naomi Cohen

Africa to benefit from China’s push for yuan as global reserve currency 0

China’s push for the International Monetary Fund to endorse its currency, the yuan or the renmibi as a global reserve currency to reflect the country’s growing share in world trade, could help shield Africa from inordinate exposure to the dollar.

Africa’s trade with China is expected to reach $385 billion by the end of 2015, creating demand for cross-border yuan settlements, which are now expensive because the transactions have to be first settled in the American dollar, the leading reserve currency.

Yi Gang, Vice-Governor of the People’s Bank of China, was quoted by the Wall Street Journal as saying that the inclusion of the yuan in the Special Drawing Rights (SDRs) would aid China’s attempts to diminish the dollar’s dominance in global trade and finance and also provide a better trading alternative.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can b e exchanged for freely usable currencies.

“We hope the IMF can fully take into account the progress of RMB internationalisation, to include RMB into the basket underlining the SDR in the foreseeable, near future,” said Mr Yi.

The IMF is expected later this year to conduct its next twice-a-decade review of the basket of currencies its members can count toward their official reserves.

Currently, the IMF recognises the Japanese yen, US dollar, sterling pound and the euro as official international foreign exchange reserve assets.

In the meantime, China is hoping to navigate the limited acceptance of the yuan by setting up official clearing windows for yuan transactions in its key markets, such as the one signed with the South African Reserve Bank on Tuesday last week.

Kenya is also pursuing a similar arrangement with Beijing, given the way Chinese contractors have come to dominate big ticket projects like the standard gauge railway.

Robert Mudida, an economist and lecturer at Strathmore Business School, said the inclusion of the yuan in the global reserve currency list would be a big boost for the Africa which is currently executing multibillion dollar infrastructure projects funded by Chinese loans.

“Africa is increasingly doing business with China and having its currency as a designated reserve will boost this trade. African economies will be the biggest winners, as this will reduce trading costs and currency conversion losses,” Dr Mudida said.

China has become a major destination for a range of African exports as well as an increasingly significant source of a wide range of manufactured goods imported by many African countries. Currently, African economies trading with China settle in dollars when trading between their own African currencies and the Yuan, an extra step that increases the trading costs.

George Bodo, head of financial desk at Ecobank Capital, said it would take a mindset shift for people to use yuan-denominated invoices.

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by Allan Olingo

Photo Credit: Nation Media Group/Mirung’u Ndung’u

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