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Weighing impact of weaker yuan in Africa

By Martin Nyongesa | China Daily Africa | Updated: 2015-08-23 14:26

Depreciation against the US dollar will not have an adverse effect in the continent, which is already moving toward trade settlement in China's currency

The recent devaluation of the Chinese yuan against the US dollar by the government in Beijing stunned world financial markets, especially in Europe and the United States, and long-term effects may be felt across the globe.

The devaluation left the Chinese currency about 3 percent weaker against the dollar. The move was first since the People's Bank of China in 2005 revalued the currency, officially known as the renminbi, against the dollar, removing the fixed exchange rate with the world's strongest currency, instead allowing the spot rate to trade within 2 percent of the daily fixing.

Economists the world over have had varied opinions on the impact of the move to devalue the currency against the dollar, an indication of the importance of the yuan to global trade. The biggest impact the move will have is to improve Chinese exports, as the country's goods will now be cheaper in world markets, hence increasing volumes and growth for its economy.

Authorities in Washington see it as a deliberate move to further increase the US trade deficit, as it would make exports to the US even cheaper than they already are. In the past, the US has raised concerns over what again it has called the significant undervaluation of the yuan.

The major currency reforms of 2005 in Beijing were meant to move the yuan closer to inclusion in the International Monetary Fund's special drawing rights basket of reserve currencies. The latest devaluation makes that more likely for the currency.

However, the devaluation of the renminbi is unlikely to affect economic cooperation between China and Africa, China's bosom friend and major trading partner. Bilateral trade between China and Africa has grown more than tenfold in the past decade, moving from $18.5 billion in 2003 to $198.6 billion in 2012. Projections by Standard Chartered Research, owned by the British bank of the same name, show that the figure will reach $385 billion this year.

International trade between China and Africa mainly relies on the dollar as the primary settling currency for transactions. But in 2009, the Chinese government started a campaign to internationalize its currency, especially in Africa, and mitigate it against risks of falling exchange rates. The campaign has now seen South Africa become the latest country to host a clearing center for the yuan to bolster cross-border trade with China.

The drive has lived up to expectations as figures indicate that in 2012 renminbi settlements in Sino-African cross-border trade rose to 35.8 billion yuan ($5.6 billion) from 5.2 billion yuan in 2011. Standard Chartered Research projects that the figure will rise to $38.5 billion this year.

China has also invested significantly in the continent through providing soft loans and engaging in infrastructure projects in exchange for a portion of Africa's abundant natural resources.

Meanwhile, the West, in particular, has criticized China for overlooking basic human rights as well as good governance. However, Beijing stands its ground on its noninterference policy in the governance of not only African countries but also all other states with which it has established diplomatic ties. The policy resonates with African governments that insist on solving their own problems.

China has been cultivating stronger economic links with African countries over the past decade, resulting in a steady rise in bilateral ties and partnerships such as expansion of trade, investment, joint projects and increased collaboration in agriculture, transport, medical care, the exploitation of natural resources and banking.

China has also greatly increased its military cooperation. Chinese troops being deployed to several African nations such as South Sudan to undertake United Nations peacekeeping missions.

The setting up of the first Chinese military base in Africa is also in the works in Marange, an area famous for diamond production in Zimbabwe. This comes amid increased bilateral agreements between the two countries in preferential trade, mining and agriculture.

Further, the establishment of the Forum on China-Africa Cooperation in 2000 is a testament to Beijing's commitment to strengthening ties with African nations.

The forum helps African and Chinese policymakers strengthen Sino-African relations. The first forum meeting, held in Beijing, was attended by more than 800 delegates from China and officials from 44 African countries.

The forum is meant to bolster collaboration between China and Africa so as to jointly meet the challenges of globalization as well as promote common development.

For now, the devaluation of the yuan will not have an adverse effect on Africa as the continent continues to import more from China than it exports to China.

The author is a professor of economics at the School of Economics, Kenyatta University. The views do not necessarily reflect those of China Daily.

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