The renminbi’s role as a reserve currency will continue to grow as it gains interest from the outside world, particularly from African central banks. The cumulative foreign reserve of African countries currently stands at around US$500 billion. Standard Bank predicts that 20% of Africa central banks’ reserves will be reallocated into renminbi in five years time, or roughly US$100 billion.
African central banks were given access to renminbi-denominated bonds for the first time after China Development Bank (CDB) allocated them a purchase quota of three-year bonds. This is an important development in the Chinese currency’s wider global use.
"China and Africa has close trade ties and therefore, it is quite natural for these African countries to want to diversify some of their foreign reserves," said Samson Lee, head of debt capital markets, Bank of China International (BOCI) to Asiamoney PLUS. "Some of these central banks will allocate some portion of their foreign reserves into renminbi assets."
CDB issued Rmb1 billion (US$157 million) of 20-year bonds in Hong Kong’s offshore market at a yield of 4.3% on July 26, the longest tenor on record for a market dominated by short-term debt, and Rmb1.5 billion of three-year notes at a yield of 2.95%.
Standard Bank acted as a sole bookrunner for CDB’s latest placement, allocating Rmb500 million of three-year offshore renminbi bonds to African central banks. The six other bond sale managers were Bank of China (Hong Kong), Bank of Communications, Barclays, HSBC, Industrial & Commercial Bank of China Asia and Standard Chartered.
About 60% of the total dim sum bonds were allocated to European, Middle East and African investors. Standard Bank’s allocation, which was placed to African investors accounted for one-fifth of the total bonds CDB issued and was the highest amongst all the bookrunners and lead managers.
"African central banks are thinking about how to diversify their foreign currency reserve away from dollars and euros," said Bing Fan, managing director at Standard Bank China to Asiamoney PLUS. "The allocation to African central banks is a reflection of the latest trend in the currency reserve strategist of some African nations, which have started to include the renminbi into their foreign exchange reserve portfolios."
"It bolsters two-way capital flows between China and Africa, which is exciting for both sides as until recently capital has mostly been flowing from China to Africa," he added.
Africa’s increasing interest to hold renminbi-denominated assets is also reinforced by the fact that China is Africa’s largest trading partner.
In 2011, Africa-China bilateral trade reached US$166 billion in 2011, an increase of 300% over 2006 figures and China’s direct investments in Africa are now nearly US$15 billion.
"The internationalisation of the renminbi is inevitable and Africa is a fertile soil and important front for this process with Rmb36 billion in trade done in the Chinese currency already during 2011," said Jeremy Stevens, Beijing-based economist at Standard Bank. "Africa should use Beijing’s desire to broaden the geographical reach and use the renminbi to reinforce its relevance."
The rise of RMB
As a result, market participants foresee a continued interest for renminbi-denominated assets from African central banks and increasingly, other types of institutional investors as well.
"We believe that African central banks will become increasingly interested and involved in the offshore renminbi market as the continent’s national and personal wealth grow in tandem with its economic and political development," said Fan. "We could see more interest from other larger organisations like pension funds or even corporates."
"We have been advising and educating them to hold the renminbi in their accounts and use it either as an alternative investment or to pay future trade transactions with Chinese clients. They can also reduce foreign exchange risks," he added.
From June 2011 to July 2012, the international adoption for the renminbi grew substantially as the number of countries processing the currency jumped from 65 to 91, which is 40% increase, according to Swift data. The names of new African countries include Uganda, Zimbabwe, Tanzania, Namibia, Lesotho, Rwanda and Madagascar.
"The internationalisation of the Chinese currency will lower transaction costs, enable better working capital and improve risk management practices, which along with various incentives will support trade flows," said Stevens.
CDB declined to reveal how much African central banks have invested in the bonds, but a source close to the matter said that the central banks of Nigeria and Tanzania had made the biggest purchase among their African counterparts.
Additionally, Standard Bank is actively working with the Chinese regulators to open up the Qualified Foreign Institutional Investor (QFII) programme to the African counterparts, which could give them access to other types of Chinese assets located onshore.
"African central banks will look for top quality Chinese bonds like government, quasi-government paper, top-tier Chinese banks and might even go down the credit curve to top commercial banks and quality corporates, which are frequent issuers," said ICBC Asia’s Lee. "This matches their investment criteria and, as a result more foreign governments will be keen to hold Chinese paper given the fact that the supply of top quality Chinese paper is still limited."