Over the last two decades, China has established a significant economic presence in most African countries. China is involved in not only commodity-rich nations such as Nigeria and South Africa but also the commodity-poor nations like Ethiopia, Kenya and Uganda. China’s lucrative economic investment package, flexible political approach, and focused big-ticket development provided an ostensibly massive opportunity to African countries. China’s financing strategy through a combination of grants, aid, and loans with a generous schedule of return particularly on infrastructure projects is an attractive option for African countries. While the financial crises in the US and the European Union have limited their investments in Africa, China is committed to investing more in the continent.
The African continent has over 1.2-billion population and it is estimated that by 2025 more than 100 cities in Africa will contain over a million people. President Xi Jinping once pointed out, “Inadequate infrastructure is believed to be the biggest bottleneck to Africa’s development’’. Brick by brick China has become a central player in Africa’s urbanisation push.
Launched in 2013, the Belt and Road Initiative (BRI) is widely understood as a geopolitical strategy to create a new, Sino-centric order in Eurasia or even across the entire world. With more than half of the 60-plus recipient countries under China’s Belt Road Initiative (BRI) located in Africa, the financing of BRI projects across Africa is mostly comprised of loans to the governments.
Without a doubt, Chinese loans have helped finance large-scale investments in infrastructure, energy and mining. Many African countries owe a debt of at least 20% of their nominal GDP to China.
It is unfair to say that China is pursuing debt-trap diplomacy, but their debt has placed them as the world’s largest bilateral official creditor, surpassing the IMF and the world bank. Due to the magnitude of such debts, China is likely to be in the driver’s seat in Africa, with a probable aim to strengthening the internationalizations of RMB. French President Macron once said that as a goodwill gesture, China should reduce or cancel Africa’s debt. China has extended debt relief to developing countries worth a combined $2.1 billion under the G20 framework, which is the highest among the group members in terms of the amount deferred.
At the heart of the Covid19 outbreak, China is the first major economy to escape from this year’s severe downturn. The stars are dominantly strengthening the Red Note aka Yuan aka Renminbi (RMB). RMB has become more and more popular as a currency in African countries because of its advantages in facilitating China-Africa trade and investment, optimizing the structure of foreign exchange reserves and stabilizing the financial system. The trading tavern for the RMB is becoming globally acceptable. The relative gains against the US dollar have recognised the geopolitical merits of attaining reserve currency status. Eventually, RMB may supplant the dollar in the world trade.
The People’s Bank of China has signed currency swap agreements with numerous African countries, strategically and commercially expanding the reach and influence of the RMB. It is reported that Rwanda and some other African countries have included the RMB in their foreign exchange reserves. South Africa, Nigeria and others have signed currency swap agreements with China, and Kenya, Zimbabwe and Botswana have shown a strong interest in using the RMB as a reserve or settlement currency.
Another driver is the rapid deployment of the digital yuan that may enable China to expand its global influence. China is the only developing nation that has released a national rollout of its own central bank digital currency (CBDC). The digital yuan could lead to the RMB becoming a much more acceptable international currency and a major advantage to the BRI for making international payments in particular remittances.
The red note is a new entrant! Looking at the recent numbers, RMB share in global foreign exchange reserves rose to 2.45 per cent in the first quarter of 2021 from 2.2 per cent in the previous three months, continuing the currency’s momentum and accelerating its path toward internationalization. The IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey, details that the total RMB foreign exchange reserves jumped to an equivalent of $287.46 billion in the first quarter, achieving nine consecutive quarters of growth
Effective from 1st October 2016, the RMB was added to the current Special Drawing Rights Basket currencies which consist of the US Dollar, Euro, Japanese Yen and the British Pound Sterling. The IMF started tracking the RMB’s share in 2017.
To keep up with RMB internationalisation more than 1,900 financial institutions are now using the RMB for payments with China and Hong Kong. The internationalisation of RMB carries great strategic significance for banks and FIs.
According to the Society for Worldwide Interbank Financial Telecommunications, in June 2021, the RMB has retained its position as the fifth most active currency for global payments by value, with a share of 2.46%. Overall, RMB payments value increased by 65.51% compared to May 2021, whilst in general, all payments currencies increased by 27.78%. In terms of international payments excluding payments within the Eurozone, the RMB ranked 6th with a share of 1.68% in June 2021.
RMB’s rise will almost certainly be a global trend but may be especially strong in Africa where almost half of central banks are planning to increase their RMB reserves. China’s rapidly increasing trade with Africa provides fertile ground and demand for cross-border RMB settlements. It is further evident that Chinese banks are playing an increasingly bigger role in the African financial sector. While the use of RMB is still limited, the currency is gradually penetrating the African market.
Contributed by –
Mr Mayank Srivastava
Director and COO, Merceron Capital LTD, Mauritius
*The views expressed are personal.