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China’s currency increasingly present in African Countries

China is increasingly using its own currency, the renminbi, in trade with third countries and an increasing number of African countries, notably Angola, have started using the Chinese currency and included it in their baskets of currencies.  South Africa, Africa’s largest economy and China’s main trading partner in Africa, was the latest country to embrace the renminbi, during the visit of China’s Foreign Minister, when the two countries launched the first exchange platform between the two currencies.  The mechanism, officials said, will facilitate exchanges between the renminbi and the rand, which are now processed directly as previously the process was indirect, through the US or Hong Kong dollar.  Previously, Ghana, Nigeria, Mauritius and Zimbabwe started accepting renminbi payments and reserves and the Nigerian central bank already has 10 percent of its foreign reserves in the Chinese currency.  Speaking to website chinafrica.info, Chinese economist Qu Hongbin said “the increase of Chinese investment abroad – especially in Africa – is a key factor in the internationalization of the yuan.”

A Chinese diplomat cited by the same site said more and more countries choose the renminbi to “avoid exchange losses in trade with China” and the Chinese currency is presented as “a strong currency that is already used daily in transactions carried out in several countries.”  “In Africa, the more trade increases, the greater the demand for the Chinese currency,” said the diplomat.  A recent HSBC study predicts that by 2020, the renminbi will be used in half of the trade conducted by China abroad, compared to 20 percent currently.  In August 2015 China and Angola signed an official agreement allowing reciprocity in the use of the currencies of both countries, which was interpreted by the Economist Intelligence Unit as a result of Angola’s “hope” that greater use of the renminbi would reduce the need for dollars.  According to Portuguese bank BPI this agreement “makes up for the lack of dollars” needed to pay for imports, but the effect in foreign exchange terms is likely to be null.  Yao Jian, Deputy Director of the Central Government Liaison Office in Macau, said in January that the Special Administrative Region would have a role in African implementation of the renminbi with China’s central government support to become a clearing house for Chinese currency between China and the Portuguese-speaking countries.  In an article recently published on the website of the Council on Foreign Relations, the financial expert on sub-Saharan Africa John Casey argues that “dollar dominance is no longer a certainty” in this region and that 2016 will be the year of “solidification of the role of the renminbi in Africa.”

Another reason given by Casey for the Chinese currency’s affirmation is the creation of the Asian Development Bank for Infrastructure and the New Development Bank (former BRICS bank), rival institutions of those based on the dollar (International Monetary Fund and World Bank) that “may soon become based on the renminbi.”  The IMF, which had decided to include the renminbi in its basket of currencies, announced this month that from October the member countries of the institution may register as official reserves foreign assets denominated in the Chinese currency that are available to meet the financial needs of balance of payments.

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