Yuan in forex reserves as nation diversifies investment

ABDUEL ELINAZA

TANZANIA is using Yuan in the foreign exchange reserves well ahead of its inclusion into the International Monetary Fund (IMF) elite basket of reserve currencies in September as it seeks to enjoy the benefits of diversification of reserves.

The inclusion of the Chinese currency also known as Renminbi (RMB) in the foreign exchange reserves is a prudent diversification of reserves when the currency is globally accepted in the ranks of the world’s most elite monies.

The Central Bank Governor, Prof Benno Ndulu, said Tanzania had included Yuan in the foreign exchange reserve in the last two years and it now accounts to 5.0 per cent of the total foreign reserves.

“We were well ahead of IMF,” Prof Ndulu said, “also we buy more Chinese bonds as payback is relative well compared to invest on US or European bonds,” he said noting it the Central Bank had reacted proactively in recognition of the steady and calibrated liberalisation of China’s financial markets. Prof Ndulu said the IMF decision reflected major shifts in the global economy and China moving towards a “more open and marketbased economy”.

He said central banks in Eastern and Southern Africa mull relocating their reserves to match more closely other five currencies that make up SDR basket. “Greater Renminbi usage in bilateral transactions will provide further impetus for trade and investment links between China and the region resulting in benefits for both sides,” Prof Ndulu said.

Recently, central banks’ governors and deputy governors, in the region met in Dar es Salaam looking into possibility of putting in place supportive measures to encourage use of the Renminbi.

The meeting organised by Macroeconomic and Financial Management Institute of Eastern and Southern Africa that drew participants form East African and SADC regions.

“This meeting will shape our responses to the Renminbi’s envisaged consequential global role,” Prof Ndulu said, adding “the need for the region to put in place supportive measures to encourage use of the Renminbi”.

Investec Asset Management Senior Economist Dr Michael Power said central bankers delayed for too long to recognise Yuan, which may had a negative impact on trade and investment. have to explain my biasses (for yuan).

We wait too long before we recognise Renminbi. We should have taken the lead and not wait for IMF to endorse it,” Dr Power said. China’s trade with African states has grown about ten times in the last decade, with the total value likely to hit 300 billion US dollars in 2015. China’s trade with Africa recorded 10 billion US dollars in 2000.

Last year, the figure grew to 220 billion US dollars. China is seeking to raise the amount to 400 billion US dollars by 2020. There are mainly three benefits of internationalization of the RMB as it will allows foreign companies trading with Chinese companies to settle the trade in yuan, hence reducing foreign exchange cost of trading via third currency. Also open up the opportunity to the larger markets and often secure better trade terms.

On financing and borrowing, the creation of dim sum and offshore RMB bond markets offer yuan borrows the chance to access a competitive and diversify funding sources. It is also opened up opportunities for international and retail investors.

The BoT, as per Prof Ndulu, has experienced that phenomenal it gets handsome return from Chinese bond that US and EU securities. On capital management front, free trade zone companies may borrow and lend funds directly with overseas from RMB cash pooling. This allows companies to centrally manage their funds and make payments directly in yuan globally.

“The yuan will eventually erode the US dollar’s global dominance, but not just yet. Beijing is not waiting though,” writes Chi Lo, a senior economist at BNP Paribas Investment Partners. BNP is global asset management firm based in France.

Experts have it that a yuan internationalisation progress, the rapidly expanding offshore of Renminbi market and greater access to the onshore Chinese market area also providing opportunities for the central banks to diversify and hence their portfolio investments