According to new research from South Africa-based Standard Bank, at least 40%, or $100 billion, of China’s trade with Africa will be denominated in renminbi by 2015. This amounts to more than the sum total of Sino-African trade in 2010. Additionally, at least $10 billion of Chinese investment into Africa will be denominated in renminbi over the same period.
The main benefits for Africa from the internationalisation of the mainland Chinese currency and greater renminbi-denominated trade will be cheaper funding and lower transaction costs, says Jeremy Stevens, Beijing-based economist with Standard Bank and author of the new paper titled: BRIC-Africa – the redback’s rise is an opportunity for Africa.
“China and Africa have a head start; close high-level political relations and robust institutions have been developed over the past decade during which China’s commercial leverage has risen sharply because successes, small and large, have already been plentiful,” he said.
Standard Bank estimates that about 1,500 Chinese firms are already operating in the 18 African nations where mainland firms have operations. “There are as many as 1 million Chinese people in Africa,” said Stevens. “Firms will want to grow their businesses in Africa, open renminbi accounts and use renminbi products; workers will want to send money home.”
According to the report, investment in Africa will find support through cheaper sources of funding in Hong Kong and better protected capital through hedging instruments, resulting in more favourable terms for Africa projects. “Internationalisation will lower transaction costs, enable better working capital and improve risk management practices, which along with various incentives, will support trade flows — especially exports of Chinese-owned and produced manufacturing goods,” he noted.
In addition, African financial institutions will play a critical facilitating role, especially those with a pan-African reach. In money markets, short-term renminbi credit facilities, deposit and call accounts will be in demand while in global markets, requirements will include a host of trading products. Chinese companies will also need transaction banking services, including renminbi-denominated accounts, cash settlement transactions and notes. Remittance flows will also need to be calibrated while more investment flows will require on-the-ground expertise in China’s various African trading partner nations.
According to Stevens, China will initially target Africa’s largest markets for Chinese exports, regional heavyweights and countries with mature financial markets, including Nigeria and South Africa, then Kenya, followed by Angola and Ghana.
