While the focus at today’s South African reserve bank (SARB) meeting was on the central bank’s dovish tilt, Governor Marcus was also questioned on whether South Africa’s newfound BRICS cooperation extended to currency coordination with China – in other words, would or has South Africa joined the throng of countries considering to add RMB to reserve assets. If so, South Africa would be the second African nation to confirm a desire for yuan in the last month, following Nigeria, whose central bank governor announced plans to shift up to 5-10% of its reserves in yuan.
While the governor didn’t confirm or deny whether the SARB’s US$41 billion in reserves (ex gold) include RMB she seemed to hint that South Africa could add RMB in the future as part of diversification. We expect they may not yet, and with relatively small to falling reserve stock, any additions would be small.
South Africa adding some RMB assets to its reserves mix would not be a surprise. After all, China is now its largest single country trading partner, with the trade dominated by resource exports (metals, coal) on South Africa’s end and consumer and capital goods on China’s. South African based Standard Bank recently gained approval for RMB trade settlement operations in 16 African countries, including South Africa, Nigeria and Angola, adding to the list of countries where some trade could start to be denominated in RMB. Given the amount of trade between the continent and China, the potential for increasing trade in RMB over the long-term could be sizeable.
Even if SSA countries enjoy their taste for RMB or seek to further diversify their mostly dollar assets, the effect would be pretty limited on a global level. Nigeria and South Africa have the largest reserves stocks south of the Sahara, at US$32 billion and US$41 billion respectively, very small compared to the major reserves holders, including of course China. However, the fact that they are considering such diversification is another sign of the increasing reliance on trade with China and a desire to make sure that trade and investment is increasingly in Africa’s interest.
Foreign Exchange Reserves (US$ Billion)
Source: IMF, National Central Banks
It is not surprising that the question was raised a week before the BRICS planned finance ministers meeting on the sidelines of the IMF/World Bank meetings in Washington next week. While the meeting is likely to have fewer deliverables than pre-meeting press would hope (BRICS finance ministers may find it no less easy than EZ ministers to stabilize the Eurozone), it will focus attention on the economic clout of these nations, and the differences among them.
The uncertainties in the global economy, particularly the eurozone could step up the pressure to increase bilateral trade among the BRICS and with other EM, and shifting to more domestic currency trade has long-been a key goal. Other BRICS nations were in the second wave of countries seeking trade invoicing in RMB agreements with China, to encourage use of domestic currencies, reduce currency risk and reduce some exposure to the USD. They followed initial trade invoicing deals China signed with key trading partners in Asia. In all trade invoiced in RMB accounted for over 3% of China’s trade last year, and it is rising.
China has remained quiet on which central banks have been allowed to purchase RMB, with only those of Singapore and Hong Kong confirmed, but we would expect, that a number of other central banks may well try to add to holdings, more for diversification purposes. Key oil exporters like the UAE are reportedly considering adding RMB holdings, particularly as China has put pressure to pay for oil in RMB. Yet, for countries with small reserves, RMB may primarily be of use to buy Chinese goods, RMB would not be useable for intervention purposes (something which has bothered the Japanese), nor primarily for liquidity, where the dollar continues to dominate.
It remains to be seen, however, how comfortable the PBoC will be with the RMB as a reserve asset. After all, the more RMB that circulates outside of China, the more difficult it will be to control. With the RMB not fully convertible, those that run a trade surplus with China may find it difficult to use their RMB for more than purchases of Chinese goods. This might be good for China, but not quite as good for some like the import competing sectors of its BRICS counterparts.
Thanks to Maya Senussi for the close SARB watching