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The Future Role of the Chinese Yuan in Africa

by Oyinlola IsiakaJune 21, 2018

Featured Image via Flickr/Jimmie

Recently, there has been much discussion amongst African leaders to hold the Chinese yuan in the foreign reserves of their respective nation. The Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) is the organization responsible for the forums discussing this course of action. The interregional organization is made up of 14 member states: Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. The forum strives to restructure African nations’ sovereign reserve management strategies to reflect the shifts in the global economy.

According to Xinhua, the official China press agency, Gladys Siwela-Jadagu (MEFMI spokesperson) explained that a majority of foreign reserves in Africa has been invested in the U.S. dollar. This is a poor reflection of the today’s economy as nations such as India and China are emerging as global economic powers. As a result, it is imperative that African nation’s discuss sovereign investment in the Chinese yuan as such a decision provides the nations with the opportunity to engage in economic growth.

With increased Chinese investment through loans, the energy, agriculture and transportation sectors in Africa, “it would only make economic sense to repay in renminbi (Chinese yuan). This is the reason why it is critical for policy makers to strategize on progress that the continent has made to embrace the Chinese yuan which has become what may be termed ‘common currency’ in trade with Africa,” Siwela-Jadagu stated. Additionally, investing in the yuan provides opportunities for further integration with the Chinese economy and internationalization for African economies.

Siwela-Jadagu explained that Africa could face implications by “not taking advantage of growth-enhancing opportunities with China, as it had been clear over the last five years that trade and investment with the West continued to be limited.”  There seems to be a lot of optimism surrounding investment in the yuan. As Africa is not the only region shifting towards withholding the yuan in their foreign reserves. European banks are also having discussions on the viability of holding the yuan in their foreign reserves. Earlier this year, the European Central Bank (ECB) replaced 611 million of its US dollar reserves with the Chinese yuan. “It is not a major amount but it is something that we decided on and that we want to be part of,” Deutsche Bundesbank’s Dombret explained to Bloomberg. “The fact that the renminbi [yuan] is now included in the SDR (Special Drawing Rights) basket and the fact that the ECB has decided to do that are both factors we thought about.”

For China, there is great benefit in the yuan becoming a major global currency, as the US’s international dominance is beginning to lag. The internationalization of the yuan will make China a dominant financial power, particularly in the second largest continent (Africa). However, China may still face some challenges in realizing this goal. There has been a reluctance for investment in the Chinese yuan because of capital controls and lack of transparency. These challenges will be brought up in future forums. Despite these challenges, trade between Africa and China is rapidly increasing. This provides prolific ground and demand for remnibi settlements. As the currency is gradually penetrating the African market.

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