Use of RMB as trade settlement currency expected to increase

The intensifying trade and investment ties between China and partners in the Belt and the Road Initiative are likely to bring increased adoption of the renminbi as a trade and investment financing currency, an expert says.

China and its BRI partners could reduce transaction costs by using the RMB, or yuan, as a trade settlement currency, says Carmen Ling, the global head of renminbi internationalization for Standard Chartered.

"The eventual outcome of the BRI is to increase trade flows and improve infrastructure. It is thus logical for China and BRI countries to increase trade volume by using the RMB as the trade settlement currency," she says.

Ling says the RMB is likely to be adopted in trade deals between China and Africa in particular, due to the increasing trade between the two partners.

China is Africa's largest trade partner, with trade volume between the two sides having increased by 14 percent year-on-year to $170 billion (149 billion euros; £131 billion) in 2017.

During a media briefing in August in China, Qian Keming, the vice-minister of commerce, said trade volume between China and Africa rose by 16 percent year-on-year to $98.8 billion in the first half of 2018.

Ling says China is likely to increase its imports from Africa as it seeks new sources of products due to the ongoing trade conflict with the United States.

She attributes slow adoption of the RMB in trade deals between China and Africa to a lack of adequate clearinghouses for the currency. However, this is likely to change soon as African nations' central banks consider holding RMB as part of their foreign reserves, she says.

In May, the Macroeconomic and Financial Management Institute of Eastern and Southern Africa held a forum in Harare, Zimbabwe, to discuss, among other things, the possibility of adding RMB to their foreign reserves.

After the forum, Gladys Siwela, the institute's spokeswoman, said most of the institute's member states have loans or grants from China, so it would only make sense to repay loans in RMB.

The member states of the MEFMI include Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

During the Guangzhou-Foshan Nairobi Business Forum, Patrick Njoroge, governor of Kenya's central bank, said Kenya was considering adopting the RMB as a reserve currency.

Several Kenyan banks, including Standard Chartered Bank, Equity Bank and Stanbic Bank, have already set up China-dedicated desks and increased their stock of RMB to facilitate Chinese enterprises that operate in Kenya as well as local companies trading with China.

In August 2015, China signed an agreement with Angola to make the RMB the country's second legal tender. The Angolan kwanza is also acceptable in China under the agreement.

In addition, Zimbabwe adopted the RMB as legal tender in 2016, and the Central Bank of Nigeria signed a $2.5 billion bilateral currency swap agreement with the People's Bank of China in April to ease foreign exchange currency liquidity in the country.

In September 2016, the International Monetary Fund announced the decision to include the RMB in its special drawing rights basket of currencies. However, international takeup of the RMB has been relatively low, according to the Society for Worldwide Interbank Financial Telecommunication, a global provider of financial messaging services.

However, SWIFT says RMB use is likely to grow. "Growing usage of the RMB for BRI projects across Asia and Eastern Europe could increase volumes, particularly as Chinese firms potentially move to transactions denominated in RMB. Not unexpectedly, banks are stepping up to take advantage of the shift," a SWIFT report released in January said.

Ling says China should make sure that people have the confidence to use RMB as a trade settlement currency in order to promote the currency's global status as well as reduce obstacles to financing its businesses.

"There is need for an internationally accepted clearing infrastructure in place that is able to operate among different time zones," she adds.