Some African governments and central banks are using RMB as foreign exchange reserves

China's currency Renmimbi (RMB) can be  expected to settle 15 percent of the trade between China and South Africa and China and Africa from 2016. A brave prediction, but one which Bank of China (BOC) Johannesburg Branch CEO Qiu Zhikun is confident will transpire.

The forecast was made in Johannesburg at the inaugural 2013 First South Africa-China Capital Market Forum, held in August to focus on collaborative opportunities in the counties' capital markets.

RMB in Africa

BOC Johannesburg Branch first offered RMB services in Africa in 2010, accumulating to a current total of 3.35 billion yuan ($547 million). The RMB services include settlement, clearing, loans, deposits and exchange. The bank has since opened more than 1,000 RMB-based accounts across 20 countries in Africa.

In the first quarter of 2013, BOC Johannesburg's RMB business volume in Africa reached 370 million yuan ($60.5 million), a 298-percent increase over the previous year. This figure accounted for 4.4 percent of the bank's $1.4 billion total trade settlement volume during that period. Based on this trend, the business can be expected to reach 900 million yuan ($147 million) through the remainder of 2013, BOC Johannesburg Deputy Manager Li Feng told ChinAfrica.

Figures from China Construction Bank (CCB) Johannesburg Branch, which also began providing RMB services in 2010, reported similar growth in RMB-funded services.

Gaining ground

Qiu's prediction is largely based on rapidly increasing China-Africa bilateral trade ($198.49 billion in 2012) and investment, which has provided the foundation and created demand for crossborder RMB settlement on the continent.

The positive attitude of African governments, enterprises and banks toward RMB settlements have also contributed greatly to business growth on the continent.

"Some African countries are showing increasing interest in potential opportunities arising from RMB trade settlement," said the IMF's African Department senior economist Armando Morales. Nigerian banks started to allow cross-border business settlements in RMB in April 2012, and Kenyan President Uhuru Kenyatta has promised to host an RMB clearing house in Nairobi.

Morales said that there are more than 1,500 Chinese firms now trading with 18 African countries, and that South Africa still handles most RMB settlement business in Africa, followed by Mauritius. In 2012, some $5.7 billion of China-Africa trade was settled in RMB and it can be expected to reach $15 billion by 2015 if the growth momentum is sustained, according to a Standard Chartered Bank report.

BOC Johannesburg now provides RMB clearing services for ABSA and Nedbank in South Africa, AfrAsia Bank and State Bank of Mauritius in Mauritius, Barclays and Raw Bank in Congo, and is discussing about a clearing business with Tanzanian's CRDB bank, Uganda's DFCU bank and Botswana's Barclays bank.

In Sub-Saharan Africa, the bank has Chinese business counters or offices in Ghana, Kenya, Angola and Uganda, and is now preparing to set up a sub-branch in Durban, South Africa and Mauritius, and an office in Nigeria.

CCB Johannesburg is also pushing the business along steadily through its joint-venture Rand Asia and business partner First Rand. Yun Weihua, head of Marketing and Relationship Management of CCB Johannesburg and Deputy CEO of Rand Asia, said that RMB business will grow even larger as related policies become more liberal and local people gain a better understanding of RMB settlement.

Multiple benefits

While it is clear RMB settlements are gaining momentum, what are the benefits of using the Chinese currency in this manner? Li said one of these benefits is that it helps to facilitate international trade and investment and push forward RMB globalization in Africa in general.

The use of RMB may help African countries reduce the risks and pressure caused by the fluctuation of traditionally used currencies and thus keep trade and investment more stable.

If Johannesburg becomes an RMB settlement center, it will win itself an advantageous position in the new emerging order of the international financial market, and gain a larger share in the RMB market through expanding its RMB business in deposits, investments, bonds and securities and derivatives trade, Li said.

Despite these benefits, RMB settlement still takes up a small portion in total settlement. "The U.S. dollar will probably remain the preferred settlement currency for commodity trading," said Morales.

He said this is because national banking systems may not be ready to adapt to RMB settlement too rapidly because of lack of liquidity both in RMB markets and in the international market. Another reason for RMB's small slice of the settlement pie is that most African countries are currently in a trade deficit with China and may not have a sufficient RMB balance to pay for that trade.

"As RMB has not yet flowed freely among African countries, this further reduces people's desire to use the currency in trade," Li said.

Currently there is no currency swap agreement available between China and African countries, Li said, explaining why RMB is not yet a widely used currency.He said the RMB is not fully convertible, and the anticipation for RMB appreciation also makes some importers reluctant to pay in the currency.

RMB globalization - when?

It is generally believed that RMB globalization will evolve via three phases: as an international settlement currency, an investable currency and a reserve currency. Based on the "three-step principle," Africa is now in the second phase, Li said.

Some African governments and central banks are beginning to use RMB as foreign exchange reserves, such as Nigeria, which has raised its RMB foreign reserves to 10 percent, while the South African Reserve Bank is upping its RMB figure to about 3 percent of the country's total foreign exchange reserve.

In respect to the specific timeframe RMB internationalization will be realized, Morales said the pace will depend on decisions by the countries experiencing increasing commercial and investment links with China, as well as the Chinese Government's policies in this regard.

While the RMB should first realize regionalization in Africa before internationalization, Morales believes the RMB going global is already within the realm of possibility, seeing that the currency was ranked 11th in global payment currency in June 2013, just four years after it was first used as an international settlement currency.

Whether RMB globalization comes about in 2015, as predicted by some financial experts and media, or not, the question posed on the Renminbi Services page of the Standard Chartered Bank website needs to be foremost in the minds of all role players: "Are you ready for what's next?" CA

    (Reporting from South Africa)