As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.
The renminbi’s staged retreat
In a move analysts have been predicting since February, the People’s Bank of China announced that it would be expanding the trading range the country’s currency, the renminbi – which is also widely and interchangeably referred to as the Yuan – to two percent. This doubles the current trading range of China’s currency, and is timed to minimize any impact the loosening of the range will have on the Chinese economy.
That’s because the Yuan, which for decades has been kept artificially low in value vis-à-vis the U.S. dollar by massive currency-market interventions by the PBoC, dropped in value in response to the announcement instead of, as expected by speculators, increasing in value. This decrease was due to a number of factors that included intervention by the PBoC to run up the value of the Yuan in preparation for the announcement of the loosening of the renminbi’s trading band.
The announcement was also particularly well-timed to take advantage of economic news coming out of China and very much designed to disturb as little as possible the country’s export-dependent development model. That model, which is dependent on sales of cheaply-priced Chinese-manufactured goods to mass consumer markets in the West, would have been hit hard by any sudden increase in the value of the Yuan, presenting the specter of mass unemployment to Chines Communist Party decision-makers in Beijing – a horrifying prospect for a regime that places domestic political stability, and thus the CCP’s continued unchallenged rule, above all else.
As it is, economic news out of the PRC has indicated a growing slowdown in manufacturing activity in the country at the same time that analysts have indicated that continued reliance on domestic construction activity is growing increasingly unsustainable. Combined with further news showing that the Chinese economy is now growing at its slowest rate in years – albeit at a much higher rate than the developed West – and a drawback on the Yuan could be expected. After all, cloudy economic prospects for a given country nearly always leads to a dip in the value of that country’s currency, China’s included.
Thus, the loosening of the trading rage has been timed to have the least possible negative impact. Effectively, China is having its cake – the continued export benefits of a devalued currency – while eating it, too, by keeping its larger promise to Washington to liberalize the Yuan.
Implications for Africa
The question, of course, is what does all this mean for Africa? In the long run, critics of China in Washington are correct in their belief that a stronger Yuan will mean a lessening of China’s competitive edge as the price of its goods increases vis-à-vis domestically made U.S. and European goods. In turn, this would theoretically dampen Chinese factory activity and, potentially, Chinese demand for African resources.
On the other hand, all things being equal a stronger Chinese currency will eventually mean it will be able to buy more from Africa with the added benefit that cheap Chinese-made goods of the type that can be found in every market in Africa will be more expensive. While potentially bad for African consumers, a stronger Yuan will make Africa’s domestically-sourced goods more competitive both within Africa itself as well as globally.
In the short and medium term, however, a depressed Yuan could indicate problems ahead. Clearly, a weaker Yuan will mean China will be forced to buy less from Africa while its disbursements of cash in generous trade and aid deals with governments across the continent will become less valuable. A depressed Yuan, then, coupled with the Fed’s continued tapering off of troubled asset purchases, could provide additional headwinds to Africa’s export-dependent economies, most of which have grown rich on the burgeoning resource trade with China.
Much, of course, depends upon the speed with which further liberalization of the renminbi Beijing allows to let take place. Every indication is that the Chinese are in no mood to open up either their tightly-controlled financial markets or liberalize further the tradability of the renminbi any time soon. Indeed, in both areas the Chinese have been extremely reticent to move on either and quick to point out the dangers of doing so despite blandishments from both the U.S. and Europe to move more quickly.
Last week’s announcement, then, was not so much a sign that further liberalization of the Yuan will be coming soon, but a well-timed sop thrown to the West that does little to disturb the current status quo on either side of the Pacific. For Africa, therefore, the PBoC’s move is more of a warning of things to come in the distant future than a market-mover in the here and now. Fortunately, like the impact of man-made global warming, a fully convertible and tradable Yuan will be long in coming and telegraphed well beforehand. Unfortunately, the impact on Africa’s emerging economies could be just as dramatic.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.
