High hopes for Africa’s first RMB clearing bank

Author: Lizzie Meager | Published: 6 Aug 2015
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A new renminbi (RMB) clearing bank in Johannesburg is set to reduce trading costs and boost PRC investment across Africa.

South Africa is the continent’s first country to sign such a memorandum of understanding (MoU) with the Chinese government. The MoU permits the Bank of China’s Johannesburg branch to clear payments made in the world’s fifth-largest currency by value.

China is South Africa’s largest trade partner, but conducting transactions in rand or dollars to later be converted to RMB is costly.

In June, one month before the bank’s opening, nearly one in three payments between the trade partners were settled in RMB. In 2014, that figure was 11%.

While many South African corporates are already comfortable with the currency, a local branch is likely to further boost its use.

"What Chinese authorities have tried to achieve is familiarity," said Andrew Malcolm, head of capital markets Asia at Linklaters. "With a local clearing bank, it’s reassuring for corporate treasurers to deal with their usual bank contact as an intermediary."

KEY TAKEAWAYS

  • Last month the South African and PRC governments signed a MoU permitting the Bank of China’s Johannesburg branch to clear payments settled in renminbi;
  • China is already South Africa’s largest trading partner and this move is set to boost RMB-denominated transactions across the continent;
  • This week the IMF delayed its decision on whether to add RMB to its Special Drawing Rights (SDR) basket. It said RMB still lags behind the four major freely usable currencies already in the SDR.

This does not, however create a clearing hub, as can be found in Hong Kong, Canada and the UK. Malcolm explained that although the terms are used loosely, the Johannesburg bank’s establishment was driven by trade flows.

Hubs on the other hand tend to be more strategic locations that provide exposure to the global capital markets. "The two do overlap and merge very quickly, though," he added.

Clearing hubs are also often granted an allocation of Renminbi Qualified Foreign Institutional Investor (RQFII) allowance, facilitating investment in onshore Chinese businesses. South Africa has not been granted an RQFII allowance, though it has not been ruled out by local lawyers.

High hopes

Market commentators are optimistic about the currency’s future in Africa. "It’s always exciting from an Asia perspective when a jurisdiction opens a clearing bank," said Malcolm.

"Now that Johannesburg has joined, we’d certainly look towards further development of financial products being issued from there," he added.

Dawid de Villiers, partner at Webber Wentzel in Johannesburg, said the benefits of the clearing bank will stretch further than RMB-denominated deals. "Parties will also potentially be able to hedge their exposures to the currency, by executing hedging instruments denominated in RMB," he added.


Now that Johannesburg has joined, we’d certainly look towards further development of financial products being issued from there


But while the response on the ground has been overwhelmingly positive, Francisco Khoza, partner at Bowman Gilfillan in Johannesburg, views the currency’s growth in South Africa more conservatively.

"The bigger transactions are coming from the UK and America – I would be surprised if they quickly switch from using dollar to RMB," he said.

Lawyers have been urged to closely review South Africa’s standard lending and derivatives documentation, and how it accommodates RMB, ahead of any transactions.

Chinese firms are already major investors in Africa. In 2014 Chinese Premier Le Keqiang said the country would have achieved $400 billion in trade volumes and $100 billion in direct investment across the continent by 2020.

"This will allow the BRICS nations to come together more closely economically," said de Villiers. "Not only that, but South Africa can serve as a gateway to trade between Africa as a continent and the PRC."

On Monday the IMF issued a report that addressed the possible addition of RMB to its Special Drawing Rights basket of currencies. Its final decision could be announced as late as September 2016.

If RMB was included in the SDR, it could prompt the sale of a further $100 billion in RMB-denominated assets.

See also

Panda bonds prioritised for IMF recognition of RMB

Canada’s RMB hub to lower friction costs

Banks must adapt as RMB reform quickens

 


 

 

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