China is stepping up its efforts to promote the use of its currency, the yuan, in Africa, as part of its de-dollarisation strategy and to boost its economic and political influence on the continent.
The Bank of China (BOC), the country’s largest state-owned lender, has announced that its Zambian subsidiary will help to facilitate trade and investment using the yuan in Zambia and other African countries. The move follows a state visit by Zambian President Hakainde Hichilema to China in September when the two sides agreed to increase their bilateral trade in local currencies.
Zambia is Africa’s second-largest copper producer and a major exporter of the metal to China, the world’s largest consumer. The country has been facing a debt crisis since 2020 when it defaulted on its foreign loans. China, which holds about US$4.1 billion of Zambia’s debt, helped to restructure the loans last year.
The BOC’s vice president, Lin Jingzhen, said during his visit to Lusaka in December that the bank would leverage its global network and expertise to support the use of the yuan in Zambia and other African markets.
“Actually, the Bank of China is a local clearing bank and we will earnestly act upon our responsibility and leverage our role in Zambia to support other African countries to provide holistic products and services related to the yuan and to promote the use of the yuan in bilateral trade and economic activities,” Lin said.
China has been pushing for the internationalisation of the yuan for years, as part of its ambition to reduce its reliance on the US dollar and to challenge its dominance in the global financial system. The yuan ranked fifth among the world’s most-used payment currencies in November 2023, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
In Africa, China has encouraged the use of the yuan and local currencies in trade and investment, as well as the issuance of yuan-denominated “panda” bonds by African countries. Egypt issued panda bonds worth 3.5 billion yuan (US$490 million) in 2020, while Kenya is considering doing the same to repay its US$2 billion Eurobond due this year.
China is also expanding its financial infrastructure and connectivity in Africa, such as setting up yuan clearing centers, cross-border settlement platforms, and currency swap agreements. Mauritius became the third African country to host a yuan clearing center in 2023, after South Africa and Zambia.
Analysts say that China’s de-dollarisation drive in Africa is motivated by both economic and geopolitical factors, such as avoiding US sanctions, diversifying currency risks, and enhancing its soft power.
Charlie Robertson, head of macro strategy at FIM Partners, an asset management firm, said the US sanctions on Russia had made China more determined to accelerate the use of the yuan, to protect itself from similar threats that could arise from a possible conflict over Taiwan.
“Encouraging the use of China’s currency gives China more foreign policy flexibility,” Robertson said. “It also transfers currency risk from China, which might otherwise have to accept very undervalued or overvalued US dollars from trading partners, on to its trading partners.”
Robertson explained that Egypt and Zambia now carried the currency risk from borrowing in yuan or accepting it as payment for their exports. He said this was a reasonable diversification strategy for them, as it reduced their exposure to the US dollar and the Federal Reserve’s interest rate decisions.
“In the future, the Fed will matter a little less, and the People’s Bank of China will matter a little more,” he said.
Aly-Khan Satchu, a sub-Saharan geoeconomic analyst, said Africa was at a tipping point in terms of yuan adoption, as many countries faced debt repayment woes and were shut out of dollar capital markets.
“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,” Satchu said.
He also predicted more panda bond issuances by African countries, as well as more asset-backed securities that could free up China-Africa credit lines.
Robert Greene, a non-resident scholar for the Asia Programme at the Carnegie Endowment for International Peace, said China would continue to encourage its firms to use the yuan in trade payments across the Belt and Road Initiative countries, including Africa.
He said China’s central bank and state-owned commercial banks could play a bigger role in facilitating yuan use in cross-border trade and finance, such as through bilateral currency swap agreements and settlement arrangements.
He added that many emerging markets were pursuing policies to increase the use of local currencies in cross-border trade, as a way to reduce their dependence on the dollar and to mitigate exchange rate risks.
“Also, in certain countries, there is a desire to build out financial infrastructure that is more resilient to US and European economic sanctions,” he said.
China’s yuan promotion in Africa could have positive implications for the continent’s economic development and integration, as well as for its trade diversification and balance. However, it could also pose challenges to its financial stability and sovereignty, as well as to its relations with other major partners, such as the US and the European Union.
Source: South China Morning Post
