Payment in Chinese currency, the renminbi, now accounts for 12% of China's total trade, a six-fold increase in just three years, and some experts believe the new currency will mean cheaper trade for South Africa.
More than 10 000 financial institutions globally are currently doing business in renminbi, up from 900 in June 2011, and offshore investments in the currency, almost nonexistent three years ago, now tops $143-billion.
More and more foreign companies that import Chinese goods are also choosing to pay in renminbi, especially those in emerging markets. Data from Swift, an electronic financial messaging service provider, shows that in January 2012, the renminbi was the 20th most used currency and by November had moved to 16th place, just behind the Danish krone and the rand.
Justin Chan, HSBC's deputy head of global markets (Asia Pacific) and head of Hong Kong trading, believes that trade between South Africa and China could become cheaper should the use of China's currency increase further.
"Importers can change invoicing to renminbi, Chinese companies get to use their domestic currency and South Africa can take advantage of more cost-effective forward hedging, compared to USD/ZAR [United States dollar/South African rand]."
The internationalisation of the renminbi
Chan said there might be other pricing benefits as well: "A recent survey of over 600 Chinese companies by HSBC indicates that more than 50% would consider offering discounts to buyers that invoice in renminbi."
The Chinese government has set 2017 as its target for the internationalisation of the renminbi but HSBC, one of the world's largest financial services institutions and the leading international bank in China, believes that a third of China's total trade will be settled by the renminbi by 2015. This would make the renminbi one of the top three global trade settlement currencies by volume.
Chinese corporates, encouraged by Beijing's efforts to make trade using the renminbi less onerous, are expected to choose to trade in their own currency. This matters to South Africa: China has been its biggest trading partner since 2009. A recent memorandum of understanding between the two countries is intended to ensure that China will help to promote South Africa's products and services.
The South African Reserve Bank, following discussions at last month's Brics (Brazil, Russia, India, China and South Africa) conference, has decided to invest up to about $1.5-billion, roughly 3% of its foreign exchange reserves, in China's interbank bond market. Other central banks, such as those of Russia, Saudi Arabia, Thailand and Venezuela, the Bank of Japan and the Bank of Nigeria, have started accumulating renminbi in cash and bonds. The Australian central bank recently announced plans to invest about 5% of its foreign reserves in Chinese government bonds.
Immense benefits likely
David Bloom, global head of foreign exchange strategy research at HSBC, said this week: "In 2013, the renminbi is set to see continual growth and the benefits for South Africa will likely be immense. The internationalisation of the renminbi will lead to an increase in financial flows to and from China.
"South Africa has already developed an important trade relationship with China and 12% of South Africa's exports go to China," he said. "South Africa is the 21st biggest exporter to China."
HSBC set up road shows in South Africa before this week's World Economic Forum in Cape Town to increase awareness of the growth of China's currency. HSBC China has a market share of more than 5% in renminbi capital flows involving mainland China.
Chan said that as China opened its markets more investment opportunities would become available to African fund managers and investors, such as the expansion of two schemes in particular: the qualified foreign institutional investor programme, which allows licensed foreign investors to buy and sell specified shares in mainland stock exchanges in Shanghai and Shenzhen, and the renminbi qualified domestic institutional investor programme. The latter allows qualified institutional investors to channel offshore renminbi funds into mainland stock and bond markets.
A reserve currency
China's aim is to see the renminbi become a reserve currency. This was prompted by the global financial crisis, which saw the dollar value tumble, putting at risk an estimated $3.3-trillion by the end of 2012. The dollar's fall had major implications for Chinese exporters that were invoicing in the US currency.
Andrew Dell, executive officer for HSBC Africa, said: "The opening of China's currency means, to some degree, the opening up of China's economy and, in recent years, those businesses and economies that have raised their China exposure have outperformed. Adopting the renminbi can help increase your exposure in the years to come and allow you to seize those opportunities on offer."
HSBC is not the only financial institution to support the currency. At the recent Brics conference, Standard Bank group economist Goolam Ballim was quoted as saying that the bank had introduced the renminbi into its "suite of products" three years ago.