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A Trend To Watch
BY SELVA FREIGDO - 08/06/2018 | VIEW MORE ARTICLES BY THE DAILY RECKONING

Last week, 14 African nations met in a forum in Harare, Zimbabwe.

Members of the Macroeconomic and Financial Management Institute of Eastern and South Africa (MEFMI) generally agreed that they should be including the Chinese yuan in their foreign reserves.

Why?

Well, while many of the region’s reserves are in US dollars, China is starting to play a larger role in their economies. China is increasing its influence in the area and is a major trading partner to countries in the region.

Also, many of the countries have loans from China. As MEFMI’s spokesperson explained:

This is the reason why it is critical for policy makers to strategize on progress that the continent has made to embrace the Chinese yuan which has become what may be termed “common currency” in trade with Africa.’

As MEFMI’s executive director Caleb Fundanga told Xinhua, it’s time for them to start using the yuan as a reserve currency:

The general conclusion is that we should use the yuan more because its time has come. We are doing more business (with China) so it’s natural that we use the currency of the country with which we are trading.

Just the way we have been using the (U.S.) dollar and the Euro, we want to use the Chinese currency more in our transactions because it is to our benefit.

One of the issues we discussed though was that sometimes if you have borrowed from China they want to bill you in U.S. dollars. Now we are saying our government must start discussing with Chinese enterprises (and) government so that we’re billed in yuan and then we can pay in yuan. Because there is no point if we start keeping our reserves in yuan but we’re billed in dollars. It is no good.

MEFMI countries are not alone.

The European Central Bank recently included the yuan as a foreign reserve. Other European countries like Germany and Spain are looking into holding some of their foreign currency reserve in yuan.

Back in 2016, the International Monetary Fund (IMF) added the Chinese currency into their special drawing rights (SDR) basket. Since then, more countries have been including the yuan in their international foreign reserves.

The SDR basket includes the US dollar, the euro, the yen and the British pound. To get included, the issuing country needs to be a top exporter. The currency also needs to trade in major exchange markets.

As The Telegraph reports, over 60 foreign countries have already adopted the yuan as their reserve foreign currency.

I mean, don’t get me wrong. The US dollar is still the world’s dominant currency and will likely stay in that position for a very long time. According to IMF data, the yuan only makes about 1.23% of the world’s allocated reserves. The US dollar made up about 62% of world’s allocated reserves by the end of 2017.

But, China is making headways in the internationalisation of the yuan.

China is the second largest economy in the world. It is increasing the share of the yuan traded with its main economic partners.

It is also increasing ties and the use of the currency through the Belt and Road Initiative (BRI). BRI is China’s plan to revive the old Silk Road, an old network of trade routes that used to connect China to the Mediterranean Sea.

BRI gives China a chance to expand its economic and political influence across Eurasia…and to increase currency flows.

It is also increasing its influence, exchanging finance for infrastructure. According to a recent study by Boston University, China lent US$25.6 billion in global energy projects. About US$6.8 billion of that alone went to Africa.

And, they are also increasing influence of the yuan through commodity trading. China is one of the largest importers of commodities in the world.

This year, China launched the yuan backed oil futures. Having commodities priced in yuan gives China more pricing power. And is even striking deals to give funding in exchange for commodities.

That’s why it’s important to China to keep globalisation going.

You see, BRI is about opening new roads, and expanding trade. China increasing influence in trade is also helping boost the use of the Chinese yuan.

Yet the US is increasingly imposing tariffs to reduce their trade balance deficit, which could affect global trade.

A decrease in globalisation would definitely have an impact in China’s plans.

As I said, the yuan overtaking the US dollar as the world’s main currency won’t happen anytime soon. The US dollar is still a dominant currency, and there are still too many markets tied up to the US dollar.

But, it is certainly a trend to watch. At some point in the far future, China and the yuan could come to challenge the US dollar.



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The Daily Reckoning's mission is to look at the investment world and the financial world in a sceptical and contrarian way. To do that day in and day out and tell you honestly what we see, even if it isn't always popular. If you'd like to subscribe to an alternative look at the mainstream interpretation of events, join for free here.



 

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