Implementing the African Continental Free Trade Area – The Renminbi Mechanism

22 August 2023
by Kenny Chiu

The African Continental Free Trade Area (“AfCFTA”) is the largest free trade area in the world in terms of participating countries. Launched in January 2021, it aims to foster a prosperous Africa with inclusive growth and sustainable development, uniting 1.4 billion people in countries with a combined GDP valued at USD3.14-trillion.

China’s relations with African states remain a significant source of foreign investment on the continent. Despite COVID-19 restrictions, trade between the two blocs reached USD282-billion in 2022. Historically, China has seen its investment mechanisms as instruments of mutually beneficial cooperation among developing countries. Its engagement with 35 African parliaments centres on trade opportunities, resource assessments, and capacity and infrastructure development.

Africanisation of the RMB

The future relationship between the two regions centres on the domestication and internalisation of the Renminbi (“RMB”), driven by offshore clearing centres.

The Africanisation of the RMB involves the currency’s circulation outside mainland China for cross-border settlements in Africa. In recent years, this has become popular for pricing, account settlement, financing, and as a form of reserve currency. According to Swift RMB, the RMB ranks as the fifth most active currency for global payments.

RMB Africanisation presents a shared opportunity for Africa and China. The People’s Bank of China has signalled its intention to further the offshore internalisation of the currency, making it more convenient for cross-border trade. This has the potential to decrease exchange rate risks for African businesses with substantial trade links to China, enabling them to settle transactions directly in RMB and reduce their reliance on major international currencies like the US dollar and the Euro. Such a move could provide greater stability to African economies and shield them from exchange rate fluctuations.

RMB’s contribution to sustainable development in Africa

Since the construction of the 1 860km-long Tanzania-Zambia railway in the 1960s, China has valued its cooperation with African countries, driven by a genuine desire to bolster their economies. With China’s continued economic growth, RMB Africanisation stands to benefit African nations, ensuring Chinese-African collaboration expands.

With extensive Chinese-African cooperation in recent years, the Bank of China, as the RMB clearing bank for South Africa and Zambia (appointed by the Chinese central bank), will continue promoting RMB business. Many transactions have been completed in Africa lately.


The phased implementation of the AfCFTA, alongside RMB Africanisation, will bolster the influence of developing countries in international finance. This shift challenges the financial dominance of developed countries, aiming for a more inclusive international financial order.

Historically, factors such as colonisation and subsequent conflicts have hindered many African nations on the global economic stage. Yet, in the past decade, several developing countries and emerging markets in Africa, like Angola, Ethiopia, Kenya, and Rwanda, have experienced growth rates surpassing the BRICs nations. China has been a pivotal catalyst for this growth.

Historical barriers, including a fragmented financial system, have thwarted African integration. However, RMB Africanisation could galvanise the development of financial products, bolster African financial innovation, alleviate financial risks, and foster financial cooperation. Investment in the financial services sector, accelerated by FinTech, could transform the digital payment space across numerous African jurisdictions.

Furthermore, an internationalised RMB could reduce the trade and investment costs between China and African countries, optimising the investment environment and expanding economic cooperation. Utilising the RMB within the AfCFTA will not only stimulate the bilateral flow of funds but also significantly contribute to economic and trade ties between the regions. Over the years, African central bbanks have embraced the RMB as a foreign exchange reserve currency, promoting the settlement of Chinese-African import and export trade in RMB. This reduces exchange rate risks and boosts trade efficiency. With RMB’s incorporation in the AfCFTA, economic cooperation will evolve, spanning from infrastructure investments and mineral extraction to economic collaboration, strengthening cross-border financial systems and facilitating information sharing and market co-development.

Chinese banks: driving RMB Africanisation

Chinese banks are pivotal in the RMB Africanisation process within the African Continental Free Trade Area. Given China’s economic trajectory, the Chinese financial sector, epitomised by its banks, stands poised for substantial growth. They possess significant assets, diverse services, substantial foreign exchange reserves, expansive markets, and robust financial innovation capabilities. Undoubtedly, Chinese banks will lead the charge in RMB internationalisation. For instance, the Bank of China has multiple branches and representative offices across Africa, including in South Africa, Angola, Zambia, Mauritius, Kenya, Morocco, Tanzania, and Djibouti, to streamline RMB payments.

China’s financial system is robust, boasting a solid risk mitigation capacity and a methodically structured financial framework with specific credit construction, diverse financial products, and superior financial innovation and development. African countries and businesses should understand this landscape, intensifying business interactions with Chinese banks in Africa, identifying collaboration opportunities, and amplifying Sino-African economic exchanges.

However, the risks associated with RMB exchange rate fluctuations cannot be overlooked. The RMB’s internationalisation occurs in a foreign exchange market dominated by currencies like the US dollar and the Euro. Currency fluctuations are inevitable. Although the RMB might appreciate in the short term, due to China’s post-COVID-19 economic recovery, long-term predictions remain uncertain. Resource-rich African businesses should prepare for this by transacting offshore via established RMB offshore financial centres in Africa. By doing so, they can realise direct RMB payments, cut currency trading costs, and strengthen collaborations with African financial institutions, thereby enhancing market confidence and supporting economic and trade development between Africa and China.

In a recent BRICS ministerial summit held in Cape Town, the bloc contemplated a new shared currency for international trade as an alternative to the US dollar. Since 2015, BRICS has already established a USD100-billion Contingent Reserve Arrangement, with China contributing USD41-billion (41%). The RMB is thus pivotal for BRICS’ financial stability. As the AfCFTA potentially becomes the world’s largest free trade area and the continent pursues further integration, the RMB is set to play a significant role as a regional currency, facilitating trade and investment. In the context of Africa’s Agenda 2063, which envisions transformed and inclusive economies driving development, the RMB is well-positioned to help achieve a prosperous and functional continent.

Kenny Chiu
Executive | Asia Practice Group