Dim sum looks tasty for Africa

April 9, 2013

The rising yuan, which hit its highest last week since China’s FX market was set up in 1994,  should boost demand for China’s offshore “dim sum” bond market, and Africa may join in the action.

Trade between China and Africa totaled $200 billion last year, and Standard Chartered expects that to hit $325 billion by 2015, so it makes sense for African governments and companies to hold assets denominated in the renminbi, or yuan as the currency is also known.

Nigeria for instance said in 2011 it would start to hold yuan in its central bank reserves, and Standard Chartered analysts said in a note that Nigeria and Tanzania’s central banks each bought 500 million yuan of a 3.5 billion yuan dim sum bond launched by China Development Bank last July. Standard Chartered says:

As the use of the CNY (yuan) as a trade-settlement currency becomes more widespread, more African central banks are likely to look to diversify their foreign exchange reserves to include the CNY.

Angola has also invested in dim sum bonds, Standard Chartered adds, while Kenya and Ghana have shown an interest in holding yuan in their reserves. Asian central banks have also been buying Chinese government debt, as China opens up its markets to international investors.
Next up is likely to be South Africa. The country’s central bank will be able to invest up to $1.5 billion in dim sum bonds, following an announcement at the BRICS summit in Durban last month.
Just as the Bank of England has said it plans a currency swap with the People’s Bank of China, to improve liquidity in the somewhat slow-starting offshore yuan bond market in London, African countries could have their own bilateral swaps. According to Standard Chartered:

South Africa and Nigeria will likely be first; we estimate that a three-year bilateral currency swap of around $20 billion is likely between China and South Africa.

African sovereigns have enjoyed massive demand for the few dollar-denominated bonds which they have issued in the past few years, and Standard Chartered says countries like South Africa and Nigeria could even launch yuan-denominated debt. African corporates who have business in China may also issue, but that may be some way off:
 For now, dim sum bond issuance by African governments or corporates outside of South Africa or Nigeria is not likely until the market has deepened and broadened enough to foster significant appetite for African debt denominated in the CNY from Singaporean and Hong Kong investors, who account for around 80 percent of demand in the dim sum market.



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