China appears to be positioning Africa as a testing ground for internationalization of the yuan as it seeks to expand the currency’s global use and break the dominance of the US dollar.

During a recent meeting in Cairo, the central banks of China and Egypt signed a series of agreements to promote the use of the yuan in trade and investment. These deals – lauded by People’s Bank of China governor Pan Gongsheng as a key step in advancing economic ties – were signed last week during Chinese Premier Li Qiang’s visit to Egypt.

They will explore a currency swap as well as panda bonds in yuan issued by overseas companies in mainland markets. The deals also cover cooperation on electronic payments, including expanding China’s UnionPay services and facilitating cross-border business in yuan for banks in the China-Egypt TEDA Suez Economic and Trade Cooperation Zone near the city of Suez. That will be done via local currency settlements made through the Cross-border Interbank Payment System, or CIPS – China’s alternative to the SWIFT international payment network.

Egypt joins a growing list of African nations that have yuan-based deals with China, including South Africa, Nigeria and Angola which are all exploring or implementing the use of the Chinese currency for trade and financial transactions.

For example, Nigeria has a currency swap agreement with China that was renewed in December for 15 billion yuan (US$2 billion), allowing direct exchange between the naira and the yuan that bypasses the US dollar.

Last week, China Development Bank and the Development Bank of Southern Africa signed a loan deal worth 2.1 billion yuan, their first yuan-denominated financing cooperation agreement. Beyond that, South Africa also has a currency swap agreement with Beijing that was initially signed in 2015 for 30 billion yuan and aims to facilitate bilateral trade and investment.

Johnston said China was in an unusual position as a major world trader and a large economy whose currency does not play a significant role in the global economy. She said there were historical and economic reasons for this, including China’s desire to control its capital account rather than be at the whim of speculators.

Source: ampscmp