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Jul 13, 2012

Chinese currency to rule trade

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Renminbi|Africa|Brazil|China|Japan|Nigeria|Russia|South Africa|United States|USD|Gross Domestic Product|Non-oil Trade Deficit|Wen Jiabao
renminbi|africa|brazil|china|japan|nigeria|russia|south-africa|united-states|usd|gross-domestic-product|non-oil-trade-deficit|wen-jiabao
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In the wake of US dollar weakness on the back of record trade deficits and weak growth, and with China representing upwards of 60% of the US’s non-oil trade deficit, the Chinese renminbi has appre- ciated by nearly 40% against the dollar since 2005.

This has led China’s Premier, Wen Jiabao, to remark that the dollar and the renminbi “have reached equilibrium level”, an indication that China is not inclined towards allowing the renminbi to appreciate further against the dollar.

Considering that China holds more than $1.13-trillion in US bonds (down $27- billion from 2011), this makes perfect sense, as any appreciation in its currency means its bond holdings will be worth less. On the other hand, as the renminbi appreciates, its buying power increases, which should lead to an increased appetite for imports.

Officially, the renminbi is not fully convertible, and this has hampered trade in the currency to date. However, towards the end of 2011, China and Japan reached a far-reaching agreement to start trading in renminbi and the yen, while Japan will also apply to buy Chinese bonds next year, allowing it to accumulate more renminbi in its foreign exchange reserves.

China is the world’s second-largest economy, while Japan is the third-largest, and the currency agreement is part of a move away from using dollars. In 2011, only 0.3% of Chinese exports to Japan and 1.7% of Japanese exports to China were settled in renminbi, while trade deals settled in yen were only slightly higher.

While, in the short term, the agreement is likely to result in further appreciation of the renminbi against the dollar, direct renminbi- yen trading could reduce transaction costs and exchange risk in bilateral trading and investment, resulting in a win-win situation for both sides. Total bilateral trade over the last ten years has trebled to nearly $400- billion (more than South Africa’s gross domestic product) and is expected to grow rapidly as a result of the agreement. Renminbi-based trade between the two countries effectively started on June 1.

Closer to home and as a result of the volatility of the dollar, Nigeria has indi- cated that it will switch between 5% and 10% of its foreign exchange reserves into renminbi. This could be only the start of aggressive trading in renminbi in Africa in the foreseeable future. Standard Bank recently estimated that as much as 40% of all Africa-China trade of around $100- billion could take place in renminbi within the next four years, while a substantial proportion of China’s investments in Africa would be held in renminbi.

Looking at our local currency, the renminbi currently accounts for 13% of the South African Reserve Bank’s trade-weighted exchange rate, making it the third-most important currency in the basket after the dollar and the euro. In March, at the fourth Brazil, Russia, China and South Africa, or Brics, summit, South Africa endorsed the renminbi as a new international currency, especially in trade and investment in the emerging markets, indicating the political support of the South African government.

Most African currencies are relatively weak and localised, which will enable renminbi trade to reduce dealing costs in Africa through lowering trade barriers. Bearing in mind the high commissions currently charged by banks in converting currencies, Absa recently launched an electronic facility to enable direct trading in the South African rand against the renminbi.

Given that China recently became South Africa’s biggest trading partner, it is certain that renminbi-based trade between the two countries will grow at a fast rate.

Now might be the right time to start buying renminbi.

Edited by: Martin Zhuwakinyu
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