The Rationale for Renminbi-denominated foreign reserves for African countries

Abstract

International Monetary Fund ( IMF ) member countries are required to hold foreign reserves denominated in reserve currencies and China has indicated its intention to obtain a reserve currency issuer status. Given increased Sino-Africa trade, African countries may consider strategically realigning their foreign reserves to assist China, in order to secure beneficial trade arrangements. The purpose of this research was to evaluate the suitability of Renminbi-denominated foreign reserves for African countries, with a particular focus on Gross Domestic Product ( GDP ) growth. Africa could improve the market depth and liquidity of the Renminbi and support its acceptance within the IMF. China may find this beneficial as it would not affect its foreign reserve valuations nor result in significant transactional costs. The research assessed the comparability between the Renminbi and reserve currencies, China s capital account liberalisation and the impact of Sino-Africa trade on African GDP growth. The Renminbi was somewhat comparable to other reserve currency issuers. However, the impact of Sino-Africa trade on African GDP growth was limited. African GDP growth was more significantly linked to debt and Foreign Direct Investment ( FDI ). Thus African countries may rather consider pursuing Renminbi-denominated debt or FDI in order to enhance their GDP growth and Sino-Africa relationships.