December 24, 2013

Is Africa's future currency the RMB?

A question of significance regarding the global economy for the next 30 years is how the reserve currency status changes over time. As of Q4 2013, the USD is used for 80% of global trade settlement. However this is changing.

Along with the continued deterioration of respect for America around the world due to war and spying, the USD is becoming less desireable for foreign trade. In Chinese-speaking Asia, the Chinese RMB is increasing in popularity between governments, specifically Hong Kong and Singapore. Asia will become more and more dependent on the RMB for trade, but there are other regions that are up for grabs.


Africa is in the process of determining whether China will become a major part of their development. The result of this decision will determine whether the RMB will become their reserve currency. Currently, China is building roads and hospitals in Africa in return for the opportunity to strip Africa of its natural resources, specifically its mineral deposits. Though the lives of individual Africans is not improving through the Chinese gold rush, African governments will benefit from the infrastructure development.

The currency of many African nations is still unstable. If China is the first one to build professional banks with trustworthy services, the Chinese RMB has a chance of becoming a major currency in Africa. Outside of major African metropolises, people are largely unbanked and do not use money for trade. They live an agrarian lifestyle and survive with the crops they produce in the garden.

For those with cellphones in Kenya, M-Pesa is taking on a major role. M-Pesa is a payment system that lives on people's cell phones. Though this technology is available in much of the developing world, it has caught on in East Africa. M-Pesa currencies that are being used include cellphone minutes and Bitcoin.

Chinese have always been a cash-heavy society due to a deeply ingrained suspicion of government's watching their financial transactions. Thus the Chinese who have made Africa their home to become miners have undoubtedly brought a massive hoard of RMB to use with other Chinese while in Africa. However, to make life more convenient if they ever decide to venture outside of their mining communities, they will want Africans to use RMB.

As Chinese mining in Africa becomes more widespread, the desire for RMB use will rise. While the US and Europe are entrenched with their reserve currencies, will Asia and Africa go the way of the RMB? Only time will tell. 

What do you think?

3 comments:

  1. In the Philippines, we have something like M-Pesa. People can send money to their loved ones in the countryside just using the phone. It can also be used to buy items online. What people like about it is that the minimum is very small, so anybody can use it. Bitcoin hasn't caught on yet though. Only time will tell if it does.

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  2. A likely possibility is that different regions will choose different reserve currencies based on their trade relationships. Regions with strong trade relationships with the U.S. will use the dollar, regions with strong relationships with Europe will use the Euro, and regions with strong relationships with China, the RMB. One wonders if the Chinese central bank will seek to maintain the stability of the RMB as a reserve currency, or will be more focused on domestic growth. One aspect of the competition among reserve currencies is that China is deeply invested in U.S. Treasury securities. Any Chinese action that is hostile to the dollar may harm the Chinese investment in Treasury securities. As a result, there may be a tendency toward stability, rather than a war of reserve currencies.

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  3. @Aleah: In the Philippines, it's still a cash economy. Credit card use is picking up, though buying products w/ phone credit hasn't become big yet as it has with M-Pesa. Filipinos use the technology extensively for adding minutes to their phone between friends or family, but it hasn't become a daily utility for person-to-person transactions for buying from street food vendors. In the Philippines, cash is still king.

    @Gary The Chinese have halted buying US treasuries, and are trying to diversify and balance their FX portfolio with other currencies. With the huge increase of Japanese money printing, Japanese banks will likely buy up US bonds.
    http://www.businessinsider.com/japan-to-eclipse-china-in-treasury-holdings-2013-12

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