Kenya and South Africa vying to host a Yuan (RMB) Clearing House but is the time right for Africa?

As China’s influence on the global and African economies grows, so does the desire to internationalise the Yuan. The competition to host a Yuan clearing house among the Asian economy’s trading partners has grown stronger. There is little or no surprise that the RMB has moved up to 13th in the list of world payment currencies from 20th as of January 2012. Trade remains a fundamental driver of this influence as shown by the volume of her exports and imports in 2012 estimated at USD 2.0 trillion and USD 1.8 trillion respectively. While the EU and US remain the top importers of Chinese products, economic conditions and competition are forcing China to grow its trade ties with emerging economies as well as Africa.

The Asian economic powerhouse has used funding infrastructure projects in Africa as an incentive to gain a larger market share in trade and access to the continent’s resources. In a span of 12 years, China’s contribution to the total China-Africa trade has grown more than fourfold and as of 2012 accounted for 18.1 per cent of Africa’s trade volume compared to 3.8 per cent in 2000. It was valued at USD 198.5 billion in 2012 and is projected to hit USD 385.0 billion by 2015.  However, of the total trade value in 2012, only USD 5.7 billion was settled in Yuan.

Estimates by the People’s Bank of China show that transactions in Yuan would save traders between 2.0-3.0 per cent in invoicing costs for overseas traders. While this is an attractive business proposition for Africa that is a net importer from China and explains the desire to have a clearing house on the continent; does it suffice or is it in China’s best interests?

Undoubtedly the China-Africa growth trajectory is very impressive but is still small to warrant a clearing house given competition from more active and developed markets in Europe for instance London. African imports from China valued at USD 85.3 billion in 2012 accounted for only 4.3 per cent of China’s entire exports compared to Europe’s USD 391.7 billion (€ 289.7 billion) approximately 4.5 times the African imports. Even more interesting is the fact that of all import transactions for Africa only 15.0 per cent (USD 12.8 billion) were settled in Yuan. The figure is expected to make the USD 38.5 billion mark in 2015 which will be 10.0 per cent of the projected China-Africa trade in 2015.

Therefore while the future for China-Africa trade looks bright, Europe is the present considering they trade more than € 1.0 billion daily. Both London’s RMB forex activity and spot RMB increased by 150.0 per cent year on year in H1 2012 averaging a daily volume of USD 1.7 billion. The deliverable RMB forex swaps were up 240.0 per cent in the same period to USD 3.1 billion. London, Frankfurt and Paris could soon hold swap agreements worth more than USD 162.5 billion (Yuan 1.0 trillion). Global forex figures estimate an average daily turnover of USD 5.3 trillion with UK holding the largest market share of transactions at USD 2.7 trillion. Even though global average  forex transactions involving the Yuan are just above 1.0 per cent of the total market, it means that London handles more Yuan forex transactions daily than all forex transactions done in Kenya estimated between USD 330.0 million and USD 370.0 million hitting highs of USD 500.0 million at times.

China’s desire to continue growing her trade volume in Africa, tap into the continent’s resources and investment opportunities notwithstanding, Africa still lacks the economic and financial clout at the moment to warrant a Yuan clearing house. With economies like the UK, Singapore and UAE it may take another five or so years before South Africa, Kenya, Nigeria or even Mauritius host the clearing centre of what could then be a reserve currency.

Further reading

Kenya aims to host Africa’s first Yuan clearing house

Renminbi (RMB) rising

Facts and figures on EU-China trade

Global FX volume reaches USD 5.3 trillion a day in 2013

Why China’s currency has two names


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