Chinese yuan vs US dollar in Africa and elsewhere

With a rising US dollar, many African countries are facing debt repayment woes and so are moving away from using the currency. Meanwhile, China is continuing to boost the use of the yuan and local currencies in Africa as part of its de-dollarisation bid, writes ‘The South China Morning Post’.

BOC vice-president Lin Jingzhen visited Zambia in December. In a meeting with President Hakainde Hichilema, Lin promised to use the lender’s global reach to facilitate economic and trade ties using the Chinese currency – not only with Zambia, but other African nations as well.

Beijing has also encouraged the use of local currencies across various African countries as part of its de-dollarisation bid. And it has pushed for the issuance of cross-border yuan-denominated “panda” bonds.

Last year, Egypt issued three-year panda bonds worth 3.5 billion yuan (US$490 million), when it decided to opt for less conventional borrowing as it faced an economic crisis that resulted in fewer dollars and other hard currencies.

Kenya, which is also facing debt repayment troubles, is considering issuing panda bonds to secure funds to retire its US$2 billion Eurobond which is due this year.

Charlie Robertson, head of macro strategy at FIM Partners, an asset management firm, said the West’s stringent financial sanctions on Russia had made China determined to accelerate the use of the yuan, to reduce its vulnerability to similar sanctions.

“There is a good case to be made for Egypt and Zambia; this is a reasonable diversification – from mainly US dollar currency risk to a broader range of currencies,” Robertson said.

Until now, if the US Federal Reserve increased rates significantly and the US dollar strengthened, Egypt and Zambia would be very exposed, Robertson said.

“In the future, the Fed will matter a little less, and the People’s Bank of China will matter a little more.

“I have no doubt that China will push hard for more and more trade and debt to be issued in its currency, with the inducement today that Chinese interest rates are lower than in the US.”

Sub-Saharan geoeconomic analyst Aly-Khan Satchu said a powerful tailwind was driving greater adoption of the yuan.

“We are at a tipping point in Africa,” he said, saying African countries that had borrowed in dollars were not only shut out of dollar capital markets but their debts had increased on a foreign exchange-adjusted basis.

“It is an untenable situation,” Satchu said, adding that this was now pushing African countries to diversify their dollar exposure.

“It makes perfect sense to trade in [the yuan] with your largest trading partner, which is China for most of the continent. So further adoption is a no-brainer.”

Beijing is likely to continue to encourage Chinese firms to use the yuan in trade payments across countries in the Belt and Road Initiative, according to Robert Greene, a non-resident scholar for the Asia Programme at the Carnegie Endowment for International Peace.

“We could see new agreements involving China’s central bank and state-owned commercial banks aimed at increasing [yuan] use in China-Africa cross-border trade payments,” Greene said.

“One thing to watch for in 2024 is the establishment of bilateral currency swap agreements between China’s central bank and African counterparts. These agreements can be used to facilitate greater [yuan] use in cross-border trade and finance.”

In Nigeria, politicians are reportedly working to revive a 2018 bilateral currency swap agreement with the Chinese central bank.

In August, South Africa’s largest lender, Standard Bank, and the largest Chinese state-owned bank, Industrial and Commercial Bank of China, renewed a long-standing partnership that facilitates yuan use across 15 African markets.

Pic.: RT

For Beijing, it’s not so much about replacing the greenback within the current system but creating an entirely separate alternative, writes Henry Johnston, an RT finance editor.

Barely a day goes by without a headline about the Chinese yuan gaining further traction in global trade. As de-dollarization gains steam, the currency of the world’s second largest economy has been thrust into the spotlight.

China has made internationalisation of the yuan a stated policy objective – and it has gone some ways toward integration in the global financial system. However, it has resisted the type of liberalisation that could significantly elevate its status as a reserve currency.

In recent years, it has become increasingly apparent that China seeks not to carve out for the yuan a bit more room in the current Western-led system – or even dethrone the dollar and install the yuan in its place – but to create ‘from the ground-up’ the financial infrastructure that insures national sovereignty and protection from the vulnerabilities of the increasingly mismanaged dollar-based system. And it hardly needs mentioning that China is far from alone on this path.

What is now clear is that China sees the risks of the current dollar-centric system as unacceptably high – both for what we will call ‘market’ and ‘political’ reasons.

For those unable to imagine anything other than the current system, the thinking goes that a currency can have no real global status as long as it remains not fully convertible. The yuan is convertible on the current account (meaning it can be exchanged for goods and services) but not on the capital account (for investment).

In this sense, the de-dollarisation drive is not simply about dethroning the current heavyweight champion and installing a new one. For China and other countries embarking on this path, it’s a matter of sovereignty and prudent risk management.

China’s approach to promoting the yuan has three pillars: promote it as much as possible with trade partners, open currency swap agreements with other central banks, and provide loans abroad in the currency.

Regarding the first, of particular importance for China is the ability to pay for its commodity imports in its own currency. Perhaps the holy grail of this initiative would be for it to settle its oil imports with Saudi Arabia in yuan. The two countries’ central banks did reach a swap agreement last year and are reportedly in talks about settling some of their trade in local currencies.

Currency swaps allow two central banks to swap currencies at a fixed exchange rate and fixed interest rate. Such swaps are a great way to either stabilise your currency or internationalise it, depending on which side of the trade deficit you’re on. For China, it’s clearly the latter. Meanwhile, lending in yuan has become an important part of the Belt and Road Initiative, under which funding is provided for infrastructure and energy projects.

In other words, China is managing to get its currency in the hands of trade partners around the globe without taking on the risk of uncontrollable capital flows or further integration in Western financial infrastructure.

The year 2023 was a significant one for the yuan. A few simple statistics cast in sharp relief its bifurcated trajectory: its share in cross-border settlement spiked from 1.9% in January 2023 to 3.6% in October, while the People’s Bank of China reported a sharp increase in its use for trade – nearly 30% of goods and services moved in and out of the country were settled in the local currency.

In contrast to that, even as China’s domestic bond market continues to grow, the bond holdings of foreign investors declined to around 2%. In other words, the yuan is making great strides as a currency for trade but less so as an investment currency. And that seems to be exactly what Beijing wants.

So what does it all add up to? The yuan isn’t so much replacing the dollar as shifting the ground under the dollar’s feet. We’re headed toward something that is just now starting to coalesce. It will be more fragmented and less centralised. There will be more trade in local currencies, more diverse payment and settlement systems – and eventually financial and development institutions. Financial networks will be more closely aligned with trade flows and geopolitical alliances. There will likely be more central bank to central bank networks that cut out Western institutions and the dollar completely. 

It is in this beckoning world that the yuan is set to have its day.

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