Renminbi in Africa: Progress and Challenges

Zhang Xiaofeng & Wu Shan

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Renminbi in Africa: Progress and Challenges

Zhang Xiaofeng & Wu Shan

The Johannesburg Summit of the Forum on China-Africa Cooperation in December 2015 has elevated China-Africa relations to a comprehensive strategic cooperative partnership and opened a new era of win-win cooperation and common development for bilateral ties. To promote all-round industrialization and agricultural modernization in Africa and to extricate the continent from its development plight，China is providing $60 billion in funds for 10 major cooperative projects. Financial cooperation is a top priority as it plays an extremely important role in advancing pragmatic cooperation between China and Africa. One important aspect of China-Africa financial cooperation is to expand the use of the renminbi in bilateral economic and trade exchanges， in order to avoid currency risks， lower trade costs and inject new vitality into the transformation and upgrading of the economic and trade cooperation. But even as the renminbi's internationalization in Africa advances， there are still problems and challenges to be overcome.

Progress of the Renminbi's Internationalization in Africa

The renminbi's internationalization was officially launched in 2009，when the People's Bank of China started to experiment with the renminbi settlement in cross-border trade. Since then， some progress has been made in the renminbi's internationalization in Africa.

First， the renminbi-denominated settlement in cross-border trade has grown rapidly. By 2014， 18 African countries had adopted the renminbi-denominated settlements in China-Africa trade and it is estimated that the renminbi settlement of bilateral cross-border trade will amount to $15 billion in 2015. According to SWIFT， in 2015 the use of the renminbi as a means of payment in South Africa increased by 33 percent compared with that in 2014， and by 191 percent compared with that in 2013. In June 2015， one-third of direct payments between South Africa and China （including the Chinese mainland and Hong Kong Special Administrative Region） were settled in the renminbi， while the proportion was only one-tenth in 2014. Statistics from the Bank of China show that while the trade volume between China and Africa declined in the first three quarters of 2015， the renminbi receipts and payments in Africa were still sharply rising. In the first 10 months of 2015， cross-border renminbi receipts and payments in Africa grew by 35 percent to over 126.6 billion yuan. Of that， the renminbi receipts and payments in the Johannesburg branch of the Bank of China reached 61.6 billion yuan， accounting for almost half the total. In addition， South Africa's Standard Bank and the Standard Chartered Bank are actively conducting cross-border renminbi-denominated settlement. Standard Bank is the first foreign bank to provide Chinese enterprises products and services in trade financing， cash management， securities and the financial market in the renminbi.

Second， the renminbi is becoming a foreign exchange reserve asset in many African countries， with new breakthroughs achieved in currency swaps. In April 2015， the People's Bank of China and the South African Reserve Bank signed a 30 billion yuan （approximately 54 billion South African rand） bilateral currency swap agreement. This is an important measure by the governments of China and South Africa to facilitate bilateral trade and investment and safeguard regional financial security， and also a milestonein the push for the renminbi's internationalization in Africa. Currently， 24 countries have publicly announced that they hold the renminbi in their foreign exchange reserves， among them six African countries.1The six countries are Nigeria， South Africa， Angola， Kenya， Ghana and Tanzania.In 2011，Nigeria became the first African country to include the renminbi in its foreign exchange reserves. In 2012， both the Central Bank of Nigeria and the Bank of Tanzania subscribed for the renminbi-denominated bonds issued by the China Development Bank in Hong Kong. In February 2013，the South African Reserve Bank spent $1.5 billion on China's interbank bonds， accounting for 3 percent of its foreign exchange reserves at that time. In April 2016， the Industrial and Commercial Bank of China （ICBC） and the Central Bank of Nigeria （CBN） signed a trust agreement. According to the agreement， ICBC is commissioned to offer CBN financial services for the renminbi transactions， which means the free flow of the renminbi among Nigeria's commercial banks. With the renminbi's entry into theInternational Monetary Fund's Special Drawing Rights and its ongoing internationalization， African countries' strategic demands for diversified external financing and the rapid development of China-Africa trade， the Chinese currency will become an important choice for the reserves of more African countries.

Going Global: National Bank of Kenya Launches the Renminbi Business in Nairobi.

Third， the channels for the renminbi clearing operations have become increasingly developed. Chinese banks have accelerated their strategic layout in Africa and expanded the scope of their businesses on the continent through mergers and acquisitions. After taking a 20 percent stake in South Africa's Standard Bank in 2008， ICBC spent $765 million in 2014 on a 60 percent share in the bank's global market department. Standard Bank is the biggest bank in Africa in terms of its asset scale， with 1，200 business outlets and covering nearly 20 African countries. In the wake of the global financial crisis， it has downsized its global businesses and focused more on expanding the Sub-Saharan African market. The bank's business platform， its marketing network， its operation model and industrial experience are helpful for ICBC to expand its business in Africa and enhance its risk prevention， operations and product innovations.

New breakthroughs have also been made in setting up joint financial institutions with African countries. As the first China-Africa jointly-funded financial institution on the African continent， the China-Congo Cooperation Bank was officially established in Brazzaville， the capital of the Democratic Republic of the Congo， in October 2015. The registered capital of the bank is 53 billion CFA franc （approximately 600 million yuan）， of which the Agricultural Bank of China （ABC） holds 50 percent， the Congolese government 21.5 percent， Congolese private operators 12 percent， the National Petroleum Company of the Congo （SNPC） 15 percent and Zhejiang Evergreen Group 1.5 percent. The founding of the China-Congo Cooperation Bank will help ABC advance its renminbi business in the central African region with Congo as the center.

Chinese banks have also expanded the coverage of their businesses and improved the renminbi clearing channels. The Bank of China set up theJohannesburg branch in October 2010. As of June 2015， the Johannesburg branch had opened the renminbi accounts for 60 financial institutions of about 20 countries including South Africa， Mauritius， Nigeria， Kenya and Tanzania， and and it has become a main renminbi clearing channel in African countries.

Fourth， continuous improvements have been made in the building of internationalized business platforms， including a clearing mechanism and cross-border payment mechanism. In August 2015， the People's Bank of China authorized the Johannesburg branch of the Bank of China to be the renminbi clearing bank in South Africa， which marked the official launch of its renminbi clearing mechanism in Africa. The Cross-border Interbank Payment System （CIPS） was developed independently by the People's Bank of China and put into operation in October 2015. It will expand the use of the renminbi in Africa， even global trade and investment， and facilitate crossborder renminbi clearing. The construction of the two platforms will help further tap the potential for China-Africa trade and investment and expand the development space for bilateral cooperation.

Fifth， the renminbi has become a legal currency in Zimbabwe. The central banks of Zimbabwe and China struck a deal in December 2015，stipulating that from the beginning of 2016， the renminbi would circulate in Zimbabwe as legal currency， the first time for the renminbi to be a legal currency in another country. Despite its symbolic meaning considerably outweighing its immediate significance， the move testifies to the renminbi's growing influence in African countries and its positive role in the reform of the international monetary and financial system.

Major Challenges Facing the Renminbi's Internationalization in Africa

Despite significant breakthroughs and progress made in fields such as crossborder trade settlement and currency swaps， China-Africa monetary and financial cooperation still faces some problems and challenges.

Political risks

From the perspective of political stability， the political situation on the African continent has generally stabilized， but regional turbulence has become a new normal. The backlashes of the “Arab Spring，” Somali pirates， the Boko Haram terrorist group， South Sudan's civil war， Burundi's political crisis， and other regional political issues pose serious threats to peace and security in Africa. In 2016， Chad， Uganda， Congo， South Africa and Angola will have their presidential elections， and Zimbabwe will usher in a “post-Mugabe era.” Under the influences of these elections and political developments， some countries may suffer turbulence and strained political situations. Given that Zimbabwe is an important member of the Southern African Development Community， the spillover effects of any possible largescale conflict because of its presidential succession would bring catastrophic consequences to the whole of southern Africa.

Economic growth vulnerable

The African economy is expected to maintain a slight growth momentum in the next few years and the outlook for its medium and long-term growth remains positive. However， the vulnerability and regional imbalance in Africa's economic growth will add uncertainties to the development of China-Africa economic cooperation and may hinder the renminbi's internationalization in Africa. The World Bank and the International Monetary Fund forecast Africa's economic growth will maintain slow growth over the next few years， but remain vulnerable and unbalanced. In its 2016 report on economic situations in Sub-Saharan African countries，the World Bank has a comparatively optimistic outlook for African economic growth， holding that the economic situation of Sub-Saharan Africa is good on the whole. The estimate made by the International Monetary Fund is relatively negative， believing that the region's economy will only grow by 3 percent in 2016， lower than 3.4 percent in 2015. Both reports， however，point out that the declining price tendency of bulk commodities will be hardto change in the short term and will continue to be a drag on the economic growth of resource-dependent countries such as South Africa and Nigeria. While small economies featuring diversified economic structures， such as Tanzania， Mozambique and Cote d'Ivoire， will maintain rapid growth. The perception that Africa's economic growth is vulnerable is based on the long-term existence of several unfavorable factors. For instance， agricultural development in Africa has made slow progress. African countries produce and export such primary commodities as low value added raw materials while importing intermediate and finished products， and such a model puts them in a disadvantageous position in international trade and the international of the division of labor and makes their economies susceptible to price fluctuations of bulk commodities in the global market. The continent's backward infrastructure construction has also severely hampered the efforts of African countries to turn local resource advantages into development advantages. At the same time， huge foreign debts， spread of infectious diseases and poor labor quality have hindered the sustainable development of African economy. How to ward off the risks from these unfavorable factors poses a huge challenge to China-Africa economic cooperation.

Drastic exchange rate fluctuations

Currently， global economic trends are further divided， with developed economies decelerating their growth and emerging economies slowing significantly. The increase in the interest and exchange rates of the US dollar will continue to direct the flow of international capital to the US and produce negative effects on other countries' currencies. To cushion exchange rate fluctuations since the global financial crisis， Sub-Saharan African countries have sharply depleted their foreign exchange reserves and faced currency devaluations. Angola has used 10 percent of its foreign exchange reserves to stabilize its currency， which still depreciated by 19 percent in 2015. Since September 2015， Nigeria's foreign exchange reserves have declined by 20 percent and its currency has depreciated by 18 percent. The exchange rate of the South African rand to the US dollar declined to17:1 on January 11， 2016， compared with 11.5:1 a year ago. An economist from South Africa's First Rand Bank points out that the central banks of African countries have exhausted their capabilities to intervene in the currency market and will have to let their currencies depreciate more sharply in the future. African countries also suffer from seriously insufficient foreign exchange reserves. According to Bloomberg， the average foreign exchange reserve of African countries is only $5.8 billion， only 7 percent of the average volume held by 31 developing countries （excluding China） in the world（$78 billion）. Undoubtedly， the depreciation of African currencies， drastic fluctuations in their exchange rates and the sharp decline in their foreign exchange reserves will increase the cost of the renminbi's internationalization in Africa and the risks of currency swaps， and will also be detrimental to the expansion of bilateral currency swaps.

Monopolistic financial system and lack of financial tools

The African financial system is highly monopolistic， where banks play a dominant role and serve as the main channel for savings and investments. The average profit rate for the banking industry in Africa is 6 percent， higher than the 4 percent average in the rest of the world， which has resulted in a severe lack of impetus for innovation.2Hakeem I. Mobolaji， “Banking Development， Human Capital and Economic Growth in Sub-Saharan Africa （SSA），” Journal of Economics， 2009， No.10.The lack of diversified financial instruments weakens the role of financial intermediaries and restricts the supply of long-term financing. The average savings rate of banks on the African continent is only 29 percent， far below the 65 percent in other countries.3Karim Dahou， Haibado Ismeal Omar & Mike Pfister， “Deepening Financial Markets for Growth & Investment，” OECD Africa Investment Initiative， November/December 2009.Meanwhile， aside from these， the stock and bond markets in African countries remain underdeveloped. .

Low degree of the renminbi's recognition

The integrated development of China-Africa trade has advanced wellin the past few years， but the development of financial integration is not so optimistic， resulting in the decline of China-Africa economic integration. Bilateral economic cooperation is still at a low level. In spite of the rapid development of China-Africa trade and an increasing trade volume since the founding of the Forum on China-Africa Cooperation， trade with Africa still makes up a small proportion of China's foreign trade volume. In 2015， the total volume of China-Africa trade was about $179.08 billion， accounting for only 4.5 percent of China's total foreign trade volume. Among the $179.08 billion， approximately $15 billion was settled in the renminbi， accounting for 8.3 percent of the bilateral trade volume. In terms of investment，China's direct investment in Africa has annually increased by more than 20 percent since 2009. By the end of 2014， China's accumulated non-financial direct investment in Africa had reached $32.4 billion， 3.6 percent of its accumulated non-financial investment in foreign countries （$882.44 billion）during that period. However， the investment denominated in the renminbi was close to zero.

Slow steps of Chinese financial institutions

Currently， the progress of building operating networks on the African continent is still slow. Chinese financial institutions have only set up a few institutions in South Africa， Zambia and the Congo， which not only does not satisfy the financing demands of Chinese enterprises in Africa， but also fails to provide enough support to the renminbi's internationalization in Africa and thus has very limited promotional effects.

Restrictions on inflows and outflows of the renminbi

Most African countries not only have strict restrictions on their foreign exchange and limit the circulation， holding， investment and outflow of foreign currencies， but also require inflowing foreign currencies to be converted into local currencies. The size of Africa's offshore renminbi market is still limited， making it unable to be self-cycling. These， together with the US dollar-denominated system that is well established， have dissuadedAfrican governments， financial institutions and enterprises from issuing the renminbi bonds on the stock markets of the Chinese mainland， the Hong Kong Special Administrative Region or Africa.

Ways to Advance the Renminbi's Internationalization in Africa

Currently， the renminbi's use in Africa has many limitations in terms of size and scope of functions. Given that most African countries do not have a dominant currency， they have shown an increasing interest in holding the renminbi in their foreign exchange reserves against the backdrop of closer economic cooperation between China and Africa. It is viable to advance the renminbi's internationalization in Africa and gradually make the renminbi function as a clearing， investment and reserve currency in Africa.

Strengthening top-level design and building economic and financial strategic dialogue and coordination mechanisms

The internationalization of the renminbi in Africa now shows apparently unilateral characteristics， mainly reflected in the conflict between African countries' strong willingness to hold the renminbi and the lack of bilateral mechanism arrangements. Obvious information asymmetry among the governments， central banks and other financial institutions of China and African countries is also unfavorable to the renminbi's internationalization in Africa. China can include Africa in its top-level design for the renminbi's internationalization， and discuss with African governments and central banks such issues as expanding currency swaps， listed trading of the renminbi，denominating bulk commodities in the renminbi and holding the renminbidenominated foreign exchange reserves. Preference can be given to the establishment of economic and financial strategic dialogue mechanism with South Africa， Nigeria and the Economic Community of West African States （ECOWAS）. On the one hand， resource-rich countries， represented by South Africa and Nigeria， have been severely hit by the global financial crisis. In view of their sluggish growth， maintaining the stability of theircurrencies has become an urgent matter， and thus there is a strong desire for the diversification of their foreign exchange reserves. Given that China enjoys frequent high-level exchanges and close economic cooperation with South Africa and Nigeria， these two countries are China's preferred choices for economic and financial strategic dialogue. ECOWAS， meanwhile， is doing well in its institutional building， and its members have sped up economic and financial integration in recent years， with a single currency expected to be issued in 2020. Discussions can be conducted with ECOWAS on economic and financial strategic dialogue mechanisms to promote the renminbi's internationalization in Africa.

Deepening financial cooperation between China and Africa will serve as indispensable safeguard for further infrastructure building on the promising continent.

Expanding the networks of Chinese financial institutions

So far， Chinese financial institutions have set up branches in Africa mainly through acquisitions and cooperation. For example， ICBC has taken advantage of external resources in its globalization efforts. By holdingshares in Standard Bank， its services now cover more than 20 African countries. Agricultural Bank of China has jointly set up the China-Congo Cooperation Bank with the Congolese government， and this now covers the whole Central African franc zone. Nevertheless， Chinese banks' entry into Africa still lags far behind that of Chinese enterprises. Besides， the limited number of branches of Chinese banks on the African continent means they are unable to offer convenient financial services to Chinese enterprises in Africa or provide the renminbi's internationalization in Africa with enough financial support. To encourage Chinese financial institutions to further enter Africa， it is suggested that the People's Bank of China simplify examination and approval procedures for Chinese financial institutions' overseas mergers and acquisitions， while continuously improve its supervision and strengthening its regulation. And any time a Chinese financial institution sets up a branch in Africa， they should adhere to the following: First， select exemplary countries for China-Africa industrial cooperation and key countries for industrial capacity cooperation. For instance， they can take South Africa as the engine of Africa's industrialization， list Ethiopia， Kenya， Tanzania， Congo， etc. as exemplary countries， and classify Egypt， Angola， Mozambique， and so forth， as key partners for industrial capacity cooperation. Second， give priority to the building of China-Africa economic and trade cooperation zones. According to statistics， Chinese enterprises have invested and built more than 20 economic and trade zones in Africa， which have attracted more than 360 companies with an accumulative investment of $4.7 billion and a total output of more than $13 billion. With the entry of an increasing number of companies into China-Africa trade zones in the future， there will be a huge demand for financial services， which will create more opportunities for Chinese financial institutions to play a bigger role.

Increasing the renminbi's recognition and influence

The amount of China-Africa bilateral cross-border trade settled in the renminbi has been booming， but its scale is still comparatively smallcompared with the overall scale of bilateral trade. In the meantime， while China's investments in Africa are likely to continue growing， not much progress has been made in making the renminbi the investment currency. The renminbi has little recognition and influence in Africa， which largely constrains the renminbi's internationalization on the continent. Given this，China can make efforts in trade， investment and personnel. First of all，China should gradually increase the proportion of bilateral trade settled in the renminbi. In terms of imports， through establishing and improving the pricing mechanism of the renminbi-denominated oil and energy，China should actively promote the renminbi-denominated settlement of bulk commodities， build a channel for the outflow of the renminbi， and at the same time constantly develop the domestic bulk commodity futures market. In terms of exports， China should allow African countries to pay for imports from China in the renminbi， and build a channel for the inflow of the renminbi. Aside from the efforts to popularize the use of the renminbi in investment and financing cooperation， China should also seize the opportunities of industrial and capacity cooperation between China and Africa to promote the use of the renminbi in financing large-scale projects such as infrastructure and energy projects， and try to make breakthroughs in issuing the renminbi-denominated bonds. At the same time， China should continuously expand cultural exchanges and enhance the renminbi's influence and recognition among African people.

Forging South Africa into a regional renminbi offshore center

The development of the offshore market is indispensable to a currency's internationalization. Without a developed offshore market， the renminbi cannot be an international currency. South Africa is Africa's financial center，which makes it the most eligible country for being Africa's renminbi offshore financial center. Trade between China and South Africa has developed rapidly in the past few years， and the offshore renminbi business in South Africa has enjoyed long-term stability， which can offer some experience for the advancement of offshore renminbi business in the whole of Africa.

Advancing cooperation among China， France and Africa in West and Central African franc zones

The African franc areas are mainly in Central Africa and West Africa where there are two regional economic organizations: the Central African Economic and Monetary Community （CEMAC） and the West African Economic and Monetary Union （WAEMU）.4CEMAC is made up of six States: Cameroon， Chad， Democratic Republic of the Congo， Equatorial Guinea， Gabon and the Central African Republic （CAR）. WAEMU is made up of eight States: Benin，Burkina Faso， Cote d'Ivoire， Mali， Niger， Senegal， Togo and Guinea-Bissau.The central banks of their member countries have all business guarantee accounts with the France's Ministry of France， which guarantee the conversion of their currencies into euros. In fact， the French Finance Ministry functions as the central bank of the two regional economic organizations. China has vibrant trade and investment ties with countries in the two regions， but the renminbi's international business in these countries has progressed slowly. Currently， the two monetary unions have realized free crossborder capital flows among their respective member countries. As long as Chinese banks obtain the necessary qualifications from a member country in these unions， they can offer financial services to enterprises and residents in other members. China and France signed a joint declaration in July 2015 on conducting third-party market cooperation， clarifying that they would jointly promote market expansion in fields such as energy，environmental protection and infrastructure construction in Asia， Africa and Latin America. To this end， Chinese banks can make use of French banks' experience in the two regions and expand their regional network by strengthening cooperation with French banks in Africa. At the same time， by giving full play to Paris's role in the global renminbi offshore market， Chinese banks will be able to increase the proportion of the renminbi-denominated and renminbi-settled trade in China-Africa trade，expand the scale of direct investment using the renminbi， and achieve breakthroughs in issuing the renminbi-denominated bonds.

Zhang Xiaofeng is Associate Professor at the School of Economics and Management and the School of China-Africa International Business， Zhejiang Normal University. Wu Shan is Assistant Research Fellow at the School of Economics and Management and the School of China-Africa International Business， Zhejiang Normal University.