By Koffi Kouakou
Yuan! Can you pronounce the word yuan? It sounds unfamiliar and a bit challenging to say it, doesn’t it? Can you also say renminbi (RMB)? Even trickier, right?
Renminbi and yuan, currency denominations, are similar to using the UK sterling and pound. Get used to saying yuan, renminbi as the world changes because money talks. And the Chinese yuan is talking loud and will talk even louder in the coming decades in geopolitics and global economics on the back of the war in Ukraine.
More importantly, if you ever thought about doing business or investing in China, you might need to keep in mind that it is the second-largest global economy. Many experts foresee it will overtake the US before the decade ends.
Officially known as the renminbi, the yuan is the base unit of present-day Chinese currencies. A yuan is also known colloquially as a kuai. Very complicated stuff you may say. Yes, it is.
From the Ukraine war to US economic and trade sanctions, currency wars have taken centre stage again, making economics complicated and exciting all at once. But let’s not be bored with global currency trading complexities.
While our focus is on the humanitarian consequences of the war, we must also pay attention to the new geo-economics shift toward the Chinese yuan as a rising global currency reserve. It is influencing our lives.
For almost a decade, the yuan has been gaining ground in the global currency market as China becomes a global economic power, second to the US and perhaps the next pre-eminent economic power.
Many fascinating recent events attest to it. One of the consequences of the war in Ukraine is the US and European sanctions on China and Russia. It is strengthening the Russian rouble and caused the rise of the Chinese yuan as tradeable currency.
Long thought to be a far-off reality, these two currencies are becoming more prominent, especially the latter, and part of a global currency diversity. The prominence of the yuan and the talk of a tradeable digital yuan could help to reactivate a Brics block realignment.
During the past week, Russia, China, India and a few other nations signed yuan, rouble and rupee based bilateral trade agreements, away from the US dollar. Although a restricted currency, the internalisation of the Chinese yuan has accelerated given the explosive growth of the Chinese economy, and “since January 2009, the country has performed bilateral swap agreements with 41 nations”.
“Furthermore, although by May 2020, only 1.79% of global payments were made through the Renminbi (RMB), its internationalisation index reached 5.02 at the end of 2020.
“Consequently, the yuan became the third most internationalised currency in the world driven by the recovery of China’s economy, the boost in international currency co-operation,” according to the 2021 RMB Internationalisation Report of the International Monetary Institute (IMI).
The global economic crisis of 2008 and the US sanctions have motivated China’s move to internationalise the renminbi in swap arrangements to settle cross-border trade transactions.
According to Swift RMB Tracker, more than 1 900 financial institutions now use the renminbi for payments with China and Hong Kong in more than 100 countries, making it the second most used currency in the market today.
So, the internationalisation of RMB carries great strategic economic significance for banks and financial institutions and geopolitical weight. As China actively promotes the yuanisation, it also pushes for the de-dollarisation of the global economy and the split of the global financial system into currency enclaves.
More exciting is the yuanisation of the world and specifically of Africa. This expression embodies the idea that the yuan is rapidly becoming the currency of choice as China’s economy might rises to challenge the US dollar since the end of WWII.
While there is still a long way to go for such a phenomenon to happen, the real deal is the meaning of the yuan as a dominant global reserve currency for Africa. Of course, it will have implications, risks, and opportunities for Africa.
While its use is still limited, China’s rapidly increasing trade with Africa provides favourable growth opportunities for cross-border RMB settlements. The yuan is gradually penetrating the African market. Astonishingly enough, the yuanisation of Africa is fast taking place.
Less than a decade ago trade and investments between China and Africa grew from $149 billion in 2016, according to China’s commerce ministry, to an estimated $300bn at present. China is the largest trading partner of African countries, making the yuan a common currency in Africa. China is also the continent’s largest creditor.
In 2014, 14 African countries discussed the yuan as a reserve currency to do business with China. They included Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.
Ever since, Ghana, Kenya, Nigeria, Mauritius, South Africa, and Zambia joined in, making the yuan an Africa-wide financial instrument to possibly propel the African Continental Free Trade Area.
As Sino-Africa ties evolve, doing business with China requires trading the yuan for economic growth. So, as the continental adoption of the yuan expands, so is the future of trade in Africa. In other words, the economics of the Chinese yuan shapes the future of Africa.
Therefore, the yuanisation of Africa is the economic story of the relationship between Africa and China today and tomorrow. It must be told well.
* Kouakou is the Africa analyst and senior research fellow at The Centre of Africa China at the University of Johannesburg.