Two clerks show Renminbi (left) bank note and Kenyan Shilling (right) bank not at the new branch of the National Bank of Kenya in Nairobi on July 22 (SUN RUIBO)

China's rising global stature over the recent past lends the country to play an important role in shaping the economic growth and development agenda of the world economy. This has manifested in China's own agenda in the G20 and the International Monetary Fund (IMF), along with the global monetary and financial systems, international trade and investment policies, including those policies aimed at internationalization of the Chinese currency, renminbi.

Now, of great importance for China's partners is the need for the largest manufacturing economy and exporter of goods to take a leading role to internationalize its currency. The call to internationalize the renminbi has brought into sharp focus debate on the need for the currency to assume a greater global role either as a reserve currency or as a medium of exchange in international trade. These efforts took a turn for the better in 2016 when the renminbi joined the IMF basket of reserve currencies. The renminbi then became a major part of currencies that make up the Special Drawing Right - an alternative reserve asset to the U.S. dollar. It effectively joined the U.S. dollar, the euro, the yen and the British pound, which determines currencies that countries can receive as part of loans offered by the IMF.

While the global economy took a wait-and-see approach, African countries who have recently benefited from Chinese grants and loans to build their infrastructure, welcomed the IMF gesture to adopt the renminbi as a reserve currency.

Africa's financial leaders meet

Because of increased trade and more loans and grants being received by African countries from China, Africa has been on the forefront of evaluating the possibility of adopting the renminbi as a reserve currency - a currency that a country holds in significant quantities as part of its foreign exchange reserves for use in international transactions, international investments and all aspects of the global economy.

In the last decade, Africa has been partnering with China in exchange of goods and services and infrastructural development, a factor that greatly influenced the holding of a 14-nation meeting in Harare, Zimbabwe in May to discuss the possibility and viability of using the renminbi as a reserve currency. The meeting, themed Trends in Sovereign Reserve Management, attracted high-level participation from central bank chiefs of African countries, officials from the African Development Bank and delegates from Africa's ministries of finance. The countries in attendance included Kenya, Lesotho, Namibia, Tanzania, Zambia and Zimbabwe.

The meeting in Harare was held at a time when the IMF's data indicate that the U.S. dollar's share of currency reserves reported by the IMF fell in the first quarter of 2018 to a four-year low, while the euro, the renminbi and the sterling's shares of reserves increased. African economies growing in trade relations with China have greatly supported the need to hold their currency reserves in renminbi.

China remains Africa's biggest trading partner and many Chinese companies have invested heavily in construction, manufacturing, services, agriculture and infrastructure development. Today, more than ever, the renminbi is gaining global appellation as a legal tender. Already, some African countries such as Angola and Zimbabwe have adopted renminbi as their reserve currency. Nigeria, which is one of Africa's biggest economies, has nearly 10 percent of its reserves in renminbi. This is meritorious as it allows conversion of local currencies to renminbi without first having to convert to U.S. dollars, thereby averting exchange losses in trade. On its own, this is a signal that the U.S. dollar, as a major reserve currency, has reached its optimum level and its role as a global currency is now on the drain as that of the renminbi rises.

Africa as a trading bloc

As Africa gradually adopts the Chinese currency, the continent's exports stand to gain value. Local firms stand a chance for increased prospects for better returns, while there will be direct impact on building Africa's human capital capacity by inspiring a generation of innovators who will be absorbed in the workforce of African economies.

For the African continent, to be stronger as a trading bloc, it is inevitably important to adopt competitive global currencies, away from the traditional reverence of the U.S. dollar, the British pound or recently the euro. In addition, China-Africa relations will flourish with the Belt and Road Initiative, envisaged to grow trade and to safeguard Africa's currency from local currency volatilities.

Also, by adopting renminbi as a reserve currency, African countries will be able to carry out international trade at both bilateral and multilateral levels, because it will be easier to make international transactions between many countries that require diverse currencies for financial settlements. Since Sino-African trade has grown in leaps and bounds, it's only prudent for African economies to hold their reserves in renminbi as opposed to other foreign currencies. There are also foreign debts between Africa and China. This has led to the need for debt settlements in renminbi rather than the dollars and hence there is a need for African countries to modify their foreign currency portfolios in favor of the renminbi. With more loans expected from China to Africa, African countries will require more Chinese currency to pay off debts.

Challenges ahead

Despite the far-reaching benefits for the renminbi as a reserve currency for African nations, there is still great concern that keeping renminbi as a reserve currency will make African economies highly dependent on it. This will negate the gains made in doing away with the overdependence on one currency for international transactions.

In addition, there are fears that the renminbi may lead to illiquidity for African nations, especially due to inconvertibility, since not all countries will adopt renminbi as an international currency for settling obligations between them. This is also evidenced by the less impressive attendance at the Harare meeting where only 14 out of the 54 countries that make up the African economy were present.

The strength of the renminbi is anchored on China's stable governance system. As the EU withers away with the Brexit debacle, so too will the euro. The renminbi will surely give the other major global currencies a formidable run for their money as the preferred reserve currency in the world. 

(The writer is a Kenyan economist, consultant and a regional commentator on trade and investment)

(Comments to niyanshuo@chinafrica.cn)