China’s rise to become the world's second largest economy marks a real growth in strength of developing countries on the international political and economic stage. In addition, since Chinese Premier Li Keqiang’s four-nation tour of Africa, China-Africa relations reached an unprecedented cooperative climax. In the past, China-Africa cooperation was focused on infrastructure, construction and mineral resources’ exploration. However, the relationship between the countries is expected to strengthen into multi-dimensional, wide-ranging and deep integration. The financial cooperation between Africa and China will have an important role in the internationalisation of Renminbi (RMB).
Significance of RMB internationalisation
RMB internationalisation means the circulation of RMB outside mainland China. This has become a popular process of pricing, settlement and reserve currency in the world. As early as 2007, China started RMB internationalisation and, as China overtook Japan in 2010 to become the world's second largest economy, RMB internationalisation was irrevocably boosted.
RMB internationalisation has become an important feature in global financial issues and has assisted China to:
- reduce the cost of international trade;
- improve the communicative power of the Chinese economy; and
- quicken their advance towards mid to high-end global industries.
RMB is set to optimise the international financial ecology, increase the influence of developing countries in the international finance field and break the financial domination of developed countries.
While RMB is the real currency with world significance to developing countries, good credit and currency value will firmly and undoubtedly bring tangible benefits to the vast number of developing countries.
Chinese banks will play an important role in the process of RMB internationalisation. Through businesses like international settlement, international bank cards and fund custody, Chinese banks can develop international intermediary services and share stable earnings derived from rapid economic development and RMB internationalisation.
RMB internationalisation will allow Africa to benefit from:
- economic development and the integration of the African financial market;
- reduced trade and investment costs between China and Africa;
- an optimised investment environment; and
- enhanced economic China-Africa cooperation.
As central banks in Africa begin to accept RMB as a foreign exchange reserve currency, the exchange rate risk is reduced and the efficiency of trading activities are improved.
“The settlement in RMB can promote the flow of RMB in the international market. Nigeria is China’s major trade partner in Africa, and the settlement in RMB can reduce the exchange-cost ratio of enterprises and improve efficiency of trading activities,” said Wang Luo, deputy director of the Department of Asian and African Studies in the Research Institute of the Chinese Commerce Ministry.
The internationalisation of RMB will increase economic cooperation, but only if proper policies are implemented to cope with this.
Chinese banks are the main force promoting RMB internationalisation in Africa
Chinese banks will become the main force of RMB internationalisation in Africa. These banks have large assets, various services, considerable foreign exchange reserves, a vast market and a strong financial innovation ability and service development level.
China’s financial system is relatively sound, has a strong risk resistance capacity, a more scientific financial system, more specific credit construction, rich and diversified financial products, and superior financial innovation ability and development. African countries and enterprises should therefore develop more business contact with Chinese banks.
The risks from RMB exchange rate fluctuation should not be neglected. The internationalisation of RMB is taking place in the international foreign-exchange market which is dominated by a strong US dollar. Foreign exchange fluctuation is common and it is foreseeable that RMB will most likely continue to appreciate within the next year. Chinese banks could:
- establish offshore financial centres;
- carry out offshore financial transactions;
- realise direct payment of RMB; and
- reduce currency trading cost.
The Bank of China (Johannesburg branch) has opened accounts and processed RMB clearing business for 23 African banks, including banks in South Africa, and the reserve banks of several African countries. According to this branch, it is processing applications with 25 African banks to provide them with RMB clearing services. This is a clear indication of the tendency of the market.
RMB internationalisation also affects China's top leaders. Chinese President Xi Jinping attended the 6th BRICs Summit, and one of the results of this summit was establishing the BRICs banks. The agreed aggregate amount at the Summit for “Contingent Reserve Arrangement of BRICs” is $100 billion, and China will bear $41 billion (41%) of the cost. This means that RMB will play a key role in finance stabilisation of BRICs in future. This is an important step for RMB to move toward internationalisation.