(Mike Maharrey, Money Metals News Service) African banks are opening branches in Chinese cities in an effort to tap into growing trade ties between African nations and China.
Meanwhile, China is encouraging more yuan-based transactions, hoping to push the dollar to the sidelines.
In October, Access Bank UK, a Nigerian Access Bank subsidiary, opened a Hong Kong branch. Bank officials said the move was meant to “foster stronger economic ties between Asia and Africa under China’s Belt and Road Initiative.”
The Belt and Road Initiative is a global infrastructure strategy launched by China in 2013. Drawing its inspiration from the ancient Silk Road, the initiative is meant to improve connectivity and cooperation between Asia, Europe, Africa, and other regions through a network of trade routes, investment projects, and cultural exchanges. The project includes a land-based transportation route featuring roads, rails, and pipelines connecting China to Central Asia, South Asia, Africa, the Middle East, and Europe. The initiative also includes a “Maritime Silk Road.”
Over 140 countries have signed agreements to participate in the BRI.
Access Bank isn’t the only African financial institution putting down roots in China. South Africa-based Absa Group recently opened a non-banking subsidiary in Beijing. Absa ranks as one of the largest lenders in Africa.
According to the South China Morning Post, the new office will “provide general advisory services to clients in China for conducting transactions across Africa.” Absa officials said they hope to position the lender as “a facilitator of trade flows into Africa.”
There are several other African banks already operating in China, including the Morocco-based Bank of Africa and the National Bank of Egypt. Standard Bank, the largest African bank by assets, has a subsidiary in China.
Analysts say the presence of African banks in China will help them better serve Chinese businesses in their own countries. For instance, Zambian National Commercial Bank has extended over $176 million in loans to Chinese businesses operating in the country.
Mihaela Papa, director of research and principal research scientist at the MIT Centre for International Studies, said banks are cashing in on the growing partnership between Africa and China, adding that a physical presence in China will “facilitate trade and investment flows, providing financial services to Chinese clients operating in Africa, and supporting African businesses engaging with Chinese markets.”
Meanwhile, several Chinese banks have established offices in Africa. The Bank of China operates branches in Morocco, Angola, Zambia, and South Africa.
“The motivation behind this expansion [in Africa] is to provide loans to Chinese companies in local economies,” Kai Xue, a Beijing-based corporate lawyer who advises on foreign direct investment and cross-border financing, told the South China Morning Post.
“BOC in Zambia has tended to fund infrastructure projects in mining, smelting, water and roads,” he added.
China’s Bid for De-Dollarization
According to the Post, China is encouraging African countries to use local currencies in a bid to “de-dollarize” trade.
During the September Forum on China-Africa Cooperation (FOCAC) summit held in Beijing, China’s financing and investment commitments were given in yuan instead of U.S. dollars as President Xi Jinping committed 360 billion yuan in financial support for Africa. This equals around $49.5 billion.
China is also encouraging African countries to issue “Panda Bonds,” a renminbi-denominated bond sold in China by non-Chinese issuers. These bonds pay 2.5 percent interest. The hope is the bonds will help “internationalize” the yuan.
An Australian professor specializing in China-Africa relations told the Post that African banks establishing a presence in China helps them prepare for “an expanded role of the renminbi in Africa-related financial markets.”
Another analyst said we should expect more yuan transactions between Chinese and African parties in the near future, especially with Chinese monetary easing and dropping interest rates in that country.
This is happening despite threats by incoming President Donald Trump to apply 100 percent tariffs on any country that attempts de-dollarization.
Trump Tariffs – A U.S. Counterpunch
The Chinese push for de-dollarization doesn’t likely threaten the dollar’s dominant role in global trade – yet.
The U.S. has plenty of arrows in its quiver to protect the dollar.
In the first place, the dollar dominates global trade, and most countries aren’t willing to completely cut themselves off. Abandoning the dollar completely would have severe consequences, even for large countries such as China. In fact, the Chinese economy relies heavily on exports to the U.S. This fact alone forces countries to walk a fine line. They want to minimize their dependence and exposure to the greenback, but they can’t afford to be cut off from the U.S. completely.
The mere threat of Trump tariffs could also slow the pace of de-dollarization, particularly for countries heavily dependent on U.S. trade.
Nevertheless, aggressive tariffs could backfire on the U.S., leading to trade wars and rising domestic costs that could strangle the import-dependent U.S. economy. Bullying other countries with tariffs could also accelerate efforts by other countries to minimize dependence on the U.S. and its currency.
Just how much Trump policies can slow de-dollarization remains to be seen.
The Rise of BRICS
BRICS countries are already moving quickly toward increased internal trade among member nations. This could erode American influence over time.
BRICS is an economic cooperation bloc originally made up of Brazil, Russia, India, China, and South Africa. As of Jan. 1, 2024, the bloc expanded to include Egypt, the UAE, Iran, and Ethiopia. Saudi Arabia has also been formally invited to join but has yet to formally accept the invitation. Turkey, Azerbaijan, and Malaysia have formally applied to become members.
The BRICS fall summit adopted “The Kazan Declaration,” outlining some of the areas of agreement by members of the bloc. The blueprint could eventually elevate the power and influence of the bloc.
Russia was pushing hard for BRICS to consider an alternative payment system to replace the dollar-denominated SWIFT system before the fall summit. But after the meeting, Russian President Vladimir Putin conceded that there was no immediate plan, saying the economic bloc “have not and are not” creating such a system.
Nevertheless, plenty of rhetoric came out of the meeting indicating that the U.S. shouldn’t think de-dollarization is off the table.
After the summit, University of Tasmania professor of Asian Studies James Chin told the South China Morning Post that few countries are willing to give up the U.S. dollar entirely. Their economies are too tightly bound to the greenback. “It’s very difficult to bypass the U.S. dollar,” Chin said.
Although it may prove difficult to bring all of the BRICS nations together in agreement on specific policies or systems, it is clear they are concerned about the weaponization of the dollar and that there is a growing desire for dollar alternatives.
In fact, the Atlantic Council identifies the rise of BRICS as a threat to long-term dollar dominance.
“The project identifies the BRICS as a potential challenge to the dollar’s status due to the individual members’ signal of intent to trade more in national currencies and the BRICS’ growing share of global GDP.”
Even Modest De-Dollarization Would Be a Problem for the U.S.
Even a relatively small decline in the dollar’s status with an increasingly multi-polar global financial system where the dollar is no longer the only rooster in the hen house could prove harmful to the U.S. economy.
We were seeing this long before the BRICS summit. Dollar reserves globally have dropped by 14 percent since 2002, and de-dollarization accelerated after the U.S. and her Western allies aggressively sanctioned Russia.
Because the global financial system runs on dollars, the world needs a lot of them, and the United States depends on this global demand to underpin its bloated government. The only reason the U.S. can borrow, spend, and run massive budget deficits to the extent that it does is the dollar’s role as the world reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.
But what happens if that demand drops? What happens if BRICS nations and other countries don’t need as many dollars?
A de-dollarization of the world economy would cause a dollar glut. The value of the U.S. currency would further depreciate. At the extreme, global de-dollarization could spark a currency crisis. You and I would feel the impact through more price inflation eating away at the purchasing power of the dollar. In the worst-case scenario, it could lead to hyperinflation.
The world doesn’t have to completely abandon the dollar to create negative impacts. Even a modest drop in the demand for dollars would ripple through the U.S. economy.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
