Chinese yuan vs U.S. dollar in Africa

With a rising US dollar, many African countries are facing debt repayment woes and so are moving away from using the currency.

With a rising US dollar, many African countries are facing debt repayment woes and so are moving away from using the currency. Meanwhile, China is continuing to boost the use of the yuan and local currencies in Africa as part of its de-dollarisation bid, writes ‘The South China Morning Post’.

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.

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.

“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.”

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.

“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.

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