The expansion of the BRICS bloc and China’s increasing business in Africa are deepening the renminbi’s internationalisation as China works to lift the global use of its currency. Should the renminbi gain enough critical mass to underpin an international trading payments system, their underlying frameworks would need re-orientating.
From 2024, Saudi Arabia, Iran, Ethiopia, the United Arab Emirates, Argentina and Egypt are set to join the BRICS grouping, currently made up of Brazil, Russia, India, China and South Africa (hence the BRICS acronym). Some 20 other countries, including major emerging economies such as Nigeria, Venezuela and Indonesia, have also been keen to join.
In January, China renewed discussions with Saudi Arabia on trading oil in renminbi. In late March, a series of events involving France, Brazil, Argentina, ASEAN countries and Saudi Arabia, boosted the incentive for other countries to use the renminbi for cross-border transactions.
The expansion of the BRICS bloc would build upon this momentum by broadening the renminbi network for cross-border payments and boosting the opportunity to trade oil and other commodities in renminbi.
Brazil, China, Russia – the world’s largest commodity and energy exporters and importers – are already working together on renminbi cross-border payments. Due to international sanctions, Russia is conducting most of its trade with China in renminbi.
In March, China and Brazil struck a deal to drop the US dollar and use the renminbi directly in cross-border transactions. Iran, Venezuela and Indonesia have for some years already been settling some of their oil trades with China in renminbi. Over time, other countries may join the renminbi payments mechanism, the Cross-Border Interbank Payment System (CIPS), in part because the proliferation of US economic sanctions has increased the incentive for many countries to diversify out of US dollar risk exposure.
Research shows that even a limited shift of oil and cross-border trade to the renminbi could lift the renminbi to third place (from fifth place currently) as the most-widely-used global payments currency in the SWIFT system, leapfrogging the Japanese yen and pound sterling.
China’s burgeoning trade relationship with Africa could boost renminbi internationalisation. China runs a large trade surplus with Africa (see Exhibit 1), which means that African demand for renminbi to pay for Chinese imports far exceeds the supply of renminbi it receives by exporting to China.
China has built the financial infrastructure for renminbi cross-border payments with Africa by signing bilateral currency swap agreements with key countries, including South Africa (RMB 30 billion since 2015), Egypt (RMB 18 billion since 2016) and Nigeria (RMB 15 billion since 2018). These agreements allow the countries to borrow from the People’s Bank of China the specified amount of renminbi to pay for their Chinese imports without using the US dollar as the conduit currency.
China set up offshore renminbi clearing banks in South Africa and Zambia in 2015, and in Mauritius in 2022. In May, a China-Africa cross-border settlement centre in China’s Zhejiang province was established to facilitate direct renminbi cross-border payments. Kenya, Tanzania and Ghana could soon sign currency swaps with China due to their rising Chinese imports.
SWIFT data shows that countries with close China trading ties have quickly taken up renminbi trade settlement. In this regard, South Africa and Nigeria could considerably increase the global share of renminbi-denominated trade (see Exhibit 2) – they are already the largest and second largest importers, respectively, of Chinese goods in Africa.
Ethiopia could see a significant increase in renminbi-denominated cross-border payments due to the potential of increasing its gold exports to China and large imports from China (almost 30% of its total imports). Gold is instrumental for building up the ‘petro-yuan’ in the renminbi internationalisation process.
To boost Saudi Arabia’s confidence in trading oil in renminbi, China has pledged to back deals with gold. This in effect makes the renminbi convertible into gold for Saudi Arabia. If such strategy succeeds in getting Saudi Arabia to buy into the petro-yuan initiative, other countries and oil exporters may follow.
Such a development would cause China’s demand for gold to facilitate renminbi internationalisation to rise and allow major gold exporters such as Ethiopia to grow trade with China and the use of renminbi.
Official data shows that China’s gold reserves have risen sharply in recent years (see Exhibit 3). This may signal that Beijing is preparing for gold-backed renminbi internationalisation. Other major emerging market central banks, notably those in Singapore, India and Turkey, have increased their gold reserves sharply since early 2023, partly indicating their intention to diversify out of their US dollar risk exposure.
Renminbi bonds and internationalisation
Creating more renminbi assets, such as renminbi-denominated bonds, can be a crucial step towards an international currency as it creates an incentive for countries to use, hold and invest the renminbi that they have accumulated. Renminbi-denominated bonds issued by African (and other developing nations) governments and companies could result.
Egypt, a new member of BRICS that has limited access to international capital markets, was the first African economy to issue a Panda bond to finance green and social projects in May 2023. Already, more than 5% of Cameroon, Kenya and Tanzania’s external debt is denominated in renminbi.
With the US increasingly using financial sanctions, there is an incentive for African (and other) countries to reduce their US dollar risk and shift to the renminbi in cross-border transactions and renminbi bonds.
Renminbi internationalisation could involve China preparing to become a debtor country in the long term. This may sound remote at this stage because China is still accumulating balance of payments surpluses.
However, growth headwinds including an ageing population, falling productivity due to a shrinking workforce and a maturing urbanisation process may cause China’s current account to drop into deficit over time and raise the need for foreign borrowing to fund the deficit. Already China’s current account surplus has been declining since the peak in 2007 (see Exhibit 4).
Cheap financing is a key consideration for China’s move to net borrowing. As is the case for the US, currency internationalisation can provide access to funding at attractive rates despite shaky national finances.
In summary, the expansion of the BRICS bloc and China’s increasing economic linkages with Africa are reinforcing Beijing’s salami-slicing efforts to internationalise the renminbi and gradually make it an asset class in its own right rather than just being another emerging currency.
 A Panda bond is a renminbi-denominated bond issued by a non-Chinese entity sold in China.