RMB/Africa currency hedging sees ‘substantial’ growth in past 12 months

Increasing levels of trade between Africa and China have driven the emergence of an increasingly active RMB derivatives market

The rapid increase in China's trade with Africa has driven a "significant" growth in the number of renminbi-denominated hedging transactions across the continent, according to South African firm Absa Capital.

Figures from the Chinese government show that in 2011, two-way trade volume between China and Africa hit $166.3 billion – a year-on-year increase of 31%, which is nearly 9% above the country's overall growth rate.

According to Johannesburg-based Chris Paizis, head of the corporate sales and risk solutions group at Absa Capital – majority owned by UK bank Barclays – local importers trading with Chinese entities are increasingly turning to the offshore renminbi markets to hedge their exposures.

"There has been quite a substantial increase in the number of transactions this year in hedging the renminbi. Year to date, we have handled more than 20 clients, across a spectrum of products including spots and forwards," he says.

This view was echoed by Erwin Pon, business development director, China-Africa investments at fellow South African firm, Rand Merchant Bank, which also sees growing demand for currency hedging in South Africa. "The majority of the demand [for renminbi services] is on the trade side, but the hedging side is coming up. It's still quite new in that market, but there is definitely demand." he says.

Local importers make up the majority of the clientele for trade and hedging services. An executive at the Johannesburg branch of a major Chinese bank says he is seeing forex hedging demand from Chinese corporates sourcing their capital inputs and personnel from China.

"These companies need to pay these costs in renminbi with their rand profits. They normally build the currency fluctuation into the product price, but that leaves them vulnerable to bigger movements. A number of these companies are now moving to alternative ways to mitigate this risk," he says.

The renminbi has gained traction outside South Africa, where a number of regional corporates are increasingly looking to transact in the renminbi. Barclays Africa and Absa Capital provide renminbi crosses with 11 regional currencies on their online forex trading platform through their strategic partnership.

Paizis also revealed growing interest among African corporates in raising renminbi debt in the offshore dim sum market. "As global demand for longer-tenor investments in the renminbi grows, there is a concerted effort to bring that to our potential issuers in Africa as a new market. A lot of discussions across the continent are taking place in this regard," he says.

Andrew Dickens, head of markets at Absa Capital, believes the growth and increased interest in trade between China and Africa means the market in renminbi products can be expected to be a significant driver of the African financial landscape.

"A lot of the African financial markets are not especially developed or comprehensive from a derivatives offering standpoint. But as more and more corporates and firms engage and seek to invest in the African markets, the tenor and duration of the yield curves of the debt products is growing and offering increasing opportunities," he says.

Although the underlying trade is the major driver of the expansion of the renminbi in Africa, Rand Merchant Bank's Pon believes China's loosening peg with the US dollar will drive investment demand in the currency by local players, as "the renminbi will then be truly seen as a viable alternative to the US dollar once it starts to reflect underlying Chinese economic fundamentals."

Peter Poon, London-based senior manager for global markets at South African firm Standard Bank – 20% owned by China's ICBC – has already seen growing institutional demand for renminbi-based assets. "African institutional investors are starting to look at renminbi-denominated assets as investments, due to better yield and stability of the currency versus the US dollar and the euro. Also, from their perspective, they consider the potential for portfolio diversification," he says.