The sensible shift to the yuan

Africa's growing acceptance of the Chinese currency will create business opportunities for both

In late October, Uganda State Minister for Industry James Mutende converted about 4.4 million Ugandan shillings into 10,000 yuan in a Stanbic Bank branch in the capital Kampala. Chinese Ambassador to Uganda Zhao Yali then exchanged 500 yuan into the local currency immediately afterward.

The two transactions were simple but significant. Together, they proved that the yuan has become a convertible currency for Uganda's Stanbic Bank.

Major Chinese banks and partners, including the Bank of China and UnionPay, have led the charge to internationalize the yuan in Africa in recent years, but for the first time a local African bank has taken the first step in offering it to the African market.

Stanbic Bank, through its parent Standard Bank South Africa and its partnership with Industrial and Commercial Bank of China, is providing a unique opportunity for its customers to leverage their extensive network and enjoy seamless processing of transactions across China and Africa. Standard Bank is the largest bank on the African continent and ICBC is its biggest shareholder.

The yuan's entry into many markets around the world has been seen as a challenge to the existing Bretton Woods Agreement, which is dominated by the US dollar and helped usher in an adjustable pegged foreign exchange rate system. But to Africa, the introduction of the yuan makes a lot of sense from a business standpoint.

"China is Uganda's biggest trading partner by far, accounting for about $570 million in trade between the two countries. This capability goes a long way in easing and enhancing trade between the two countries," says David Wandera, head of global market sales at Stanbic Bank Uganda Ltd.

He says importers currently buy US dollars locally and convert them into yuan in Chinese mainland to pay for supplies, which exposes the trader to multiple currency conversion risks.

"Our proposed product reduces the trader's transaction costs associated with multiple currency conversions by enabling direct exchange from the Uganda shilling straight to yuan. We believe that this can save the trader up to 5 percent in transaction costs. This can be the difference between a viable and nonviable business," Wandera says.

He expects increasing business links between the two nations, especially in energy and infrastructure as the Ugandan government focuses on these two sectors. He adds that there are also growing opportunities for Ugandan coffee, tea, tobacco and leather exports into China.

Uganda is not the first African country to realize the importance of the yuan. Countries like Nigeria, Tanzania and Zimbabwe have all diversified a proportion of their national reserves into yuan. Buying and selling in yuan has already become a regular business for many local banks in Africa.

The internationalization of the yuan is important to China for two reasons: It will help reduce its costs of international trade and improve the communicative power of the Chinese economy.

But Africa will also benefit from the yuan's internationalization because its future economic development and integration of the African financial market will be more successful with a more diversified currency basket. And as China becomes one of the continent's biggest investors, the yuan's internationalization will open more business opportunities for African countries in overseas markets.

Ensuring financial stability and security may be one of the reasons for the currency shift in African financial institutions, but more importantly the trend is due partly to the booming financial flow between two markets.

China is now the biggest trading partner on the African continent and African exports to China are on the rise as well. More African businesspeople are seeking business and investment opportunities in China.

Thus a convertible yuan is vital to both sides, with institutions working to make the yuan more accessible. In the Democratic Republic of Congo, you can apply for a yuan bank card at a local bank that has an association with major Chinese card issuer UnionPay.

As Stanbic's Wandera pointed out, the adoption of the yuan will likely be introduced to more African countries to enhance the efficiency, transparency and promptness of trade between Africa and China.

The author is China Daily's correspondent in Nairobi. Contact the writer at lilianxing@chinadaily.com.cn

(China Daily Africa Weekly 11/07/2014 page10)