Chinese yuan gives US dollar a run for its money as African trade embraces other currencies

By Jevans Nyabiage at SCMP. Article is quoted in full.

When you land at the Kenneth Kaunda International Airport in Lusaka, one of the billboards welcoming you to the Zambian capital advertises the services of the Bank of China (BOC). There are not many countries in Africa where the Chinese government-owned financial institution offers fully fledged banking services in yuan, the Chinese currency. In addition to Zambia, BOC has a branch in Johannesburg, South Africa, as well as a representative office in Kenya’s capital, Nairobi.

But it was in the southern nation of Zambia where BOC established its first African subsidiary, allowing customers to make deposits in and even withdraw Chinese yuan. Branches in both Lusaka and Kitwe, a mining town in the country’s northern Copperbelt region, serve the growing number of Chinese mining firms and immigrants. Recently, the lender also announced that its Zambian division would help to boost the use of the yuan for trade as part of China’s efforts to promote the Chinese currency in Africa.

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. “Actually, Bank of China is a local clearing bank and we will earnestly act upon our responsibility and leverage on our role in Zambia to support other African countries to provide holistic products and services related to the yuan and to promote the use of the yuan in bilateral trade and economic activities,” Lin said during his visit to Lusaka. Lin’s trip followed Hichilema’s state visit to China in September, when the two countries agreed to trade more using their own currencies.

A joint statement following a meeting between Chinese President Xi Jinping and Hichilema said the two nations would “create a favourable policy environment for promoting settlements in local currencies and support a greater role of the Chinese renminbi settlement bank in Zambia”. Zambia is Africa’s second-largest copper producer, most of it exported to China, the world’s largest consumer of the metal. But financial woes hit Zambia in 2020 when it defaulted on foreign debt.

Last June, China helped strike a deal to restructure US$6.3 billion in Zambian loans. About US$4.1 billion of this is owed to China, the country’s largest bilateral lender. 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 that could stem from a possible invasion of Taiwan. “Encouraging the use of China’s currency gives China more foreign policy flexibility,” Robertson said. “It also transfers currency risk from China, which might otherwise have to accept very undervalued or overvalued US dollars from trading partners, on to its trading partners.” Robertson explained that Egypt now carried the currency risk from borrowing in China’s currency after issuance of its panda bonds. Equally, Zambia carried the currency risk from accepting yuan as payment for its resources.

“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.” Satchu also expected more panda bonds to be issued by African countries. “I think we are just embarked on the sophistication curve and could see asset-backed pandas, for example, which would free up China-Africa credit lines and allow China to better manage its Africa lending book,” he said.

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. “In 2024 we could see China’s largest state-owned banks’ presence in Africa expand, as well as further growth of China-Africa cross-border [yuan] settlement arrangements. It is also important to watch how African banks’ connectivity with China grows,” Greene said. A China-Africa cross-border yuan settlement centre launched in Zhejiang province in mid-2023, and Mauritius now has the third clearing centre for the Chinese currency in Africa, after South Africa and Zambia. “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.

Greene said many emerging markets were pursuing policies aimed at increasing the use of local currencies in cross-border trade payments. “In some jurisdictions, officials believe that such policies could reduce domestic demand for dollars, and … help address local currency depreciation and exchange rate risks,” he said. “Also, in certain countries, there is a desire to build out financial infrastructure that is more resilient to US and European economic sanctions.”