Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Is Pushing Yuan Trade Settlements in Africa
Transcript
- Lucas: The yuan is trading at 6.78 per dollar as of this morning, down just a tick from last week, and it's steady enough that Beijing is quietly accelerating what might be the most underreported shift in global trade: pushing yuan-denominated settlements with African nations. Luna: We've talked about yuan trade settlements before, but specifically with Africa? That's a different scale. Lucas: It is. And it's not just talk. Take Angola — China is now the largest destination for Angolan oil, and a growing chunk of that is being priced and settled in yuan rather than dollars. Angola's central bank has a currency swap line with the People's Bank of China worth about 2 billion yuan, roughly 300 million dollars. Luna: So they're bypassing the dollar for oil, which is the classic petrodollar arrangement. Lucas: Exactly. And it's not just oil. Zambia, which is one of the largest copper producers, has been settling a portion of its copper exports in yuan since late 2025. The Chinese construction companies building roads and railways there get paid in yuan, and then they use that yuan to buy Zambian copper. Luna: It's a closed loop — keeps the transaction entirely within China's financial system. Lucas: Right. And that matters because China's trade surplus with Africa is significant. In 2025, China exported about 150 billion dollars more to Africa than it imported. If more of that is settled in yuan, it reduces the need for China to hold and recycle dollars. It's a move toward what economists call 'renminbi internationalization' — and it's happening faster than most people realize. Luna: Let's talk about the data we have. Yuan per dollar at 6.78, FXI up 2.1% in five days — does the market see this as bullish for Chinese assets? Lucas: It's a mixed signal. The FXI gain partly reflects optimism about stimulus, but it also reflects the fact that a weaker dollar — the dollar index is at 120.5, down slightly — makes yuan-denominated assets more attractive. If African central banks are holding more yuan reserves, they're more likely to buy Chinese bonds too. Luna: So the demand for yuan isn't just trade — it's reserve accumulation. Lucas: Precisely. The IMF's latest data shows that the yuan's share of global foreign exchange reserves hit 3.2% in Q1 2026, up from 2.9% a year earlier. That's still tiny compared to the dollar at 57%, but the growth rate is significant — about 10% growth in a year. Luna: And a big chunk of that new yuan reserve accumulation is coming from African central banks. Lucas: Yeah. Countries like Nigeria, South Africa, and Kenya have all signed bilateral swap agreements with China in the past 18 months. These swaps allow them to borrow yuan from the PBOC to settle trade, rather than using dollars. And it's not just about trade — it's also about debt. Luna: Debt? How so? Lucas: Several African nations, including Zambia and Ethiopia, have restructured loans that were originally denominated in dollars into yuan. That means they now owe China in yuan, not dollars. That gives Beijing more leverage, but it also means those countries don't need to earn dollars to pay their debts — they can earn yuan by exporting commodities to China. Luna: It's a clever system — it ties African economies more tightly to China's currency and reduces their dependence on the dollar. Lucas: And it's happening as the US trade deficit widens. The latest data shows the US trade deficit hit 77.6 billion dollars in May, up from 54.6 billion the month before. A bigger deficit means more dollars flowing out of the US — and some of those dollars are being converted into yuan by central banks. Luna: If walking through the economy with us has made something click — the way these trade flows connect to currency shifts, how a swap line in Angola affects the yuan rate — you might appreciate what keeps this show going. A handful of listeners chip in monthly at buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. Lucas: Yeah, it's a straight-up listener-supported show. No ads, no sponsors — just people who find it useful. That's it. Luna: And it makes a real difference. So back to the topic — what does this mean for the dollar's dominance longer term? Lucas: I don't think the dollar is dethroned anytime soon. But the direction of travel is clear. If China can establish the yuan as a regional reserve currency in Africa and Southeast Asia, that's a meaningful challenge to the dollar's monopoly. And the data supports it — the yuan's share of global payments via SWIFT has risen to 4.5% in June, from 3.9% in January. Luna: That's a 15% increase in six months. That's fast. Lucas: It is. And it's being driven partly by China's Cross-Border Interbank Payment System, or CIPS, which is an alternative to SWIFT. CIPS processed about 80 trillion yuan in transactions in 2025, up 30% from 2024. More than 1,400 financial institutions use it, including banks in Africa. Luna: So the infrastructure is being built alongside the trade agreements. Lucas: Exactly. It's not just about settling oil deals — it's about creating a parallel financial system. And the US is paying attention. The Treasury Department recently flagged the growth of CIPS as a concern in its semi-annual report to Congress. But there's not much the US can do to stop it. Luna: What about the risk for African countries? If they hold more yuan and the yuan depreciates, they lose value. Lucas: That's a real concern. The yuan has been relatively stable against the dollar — it's only moved from 6.8 to 6.78 in the past month — but if China were to devalue to boost exports, African reserve holders would take a hit. However, for many of these countries, the alternative is holding dollars they can't earn because their exports go to China, not the US. Luna: So it's a pragmatic choice, not an ideological one. Lucas: Right. And China is sweetening the deal with infrastructure investments. For example, China Exim Bank financed a new railway in Kenya — the Nairobi-Mombasa line — with yuan-denominated loans. Kenya now earns yuan from tourism and exports to China, and uses that yuan to service the debt. It's a neat circle. Luna: But doesn't that put Kenya in a position where China essentially controls the terms of its debt? Lucas: It does. And critics call it 'debt-trap diplomacy.' The counterargument from Beijing is that these are commercial loans on better terms than what the IMF offers. But the reality is that if a country like Zambia defaults on yuan-denominated debt, China can seize assets or renegotiate on its own terms — there's no neutral arbiter. Luna: So the geopolitical angle is huge. This isn't just an economic story — it's about influence. Lucas: Absolutely. And one more data point: the current account balance for the US is negative 226.8 billion dollars as of Q1 2026. That's a huge deficit. Every dollar that leaves the US to pay for imports is a dollar that could end up in a central bank that's diversifying into yuan. The US needs to borrow about a billion dollars a day from the rest of the world. If those lenders start preferring yuan, the dollar could weaken. Luna: And a weaker dollar makes imports more expensive for Americans — which feeds into inflation. Lucas: Exactly. So this isn't just an abstract debate about reserve currencies. It affects the price of everything from electronics to food. And it's happening right now, quietly, deal by deal, swap by swap. Luna: So where do you see this going in the next two or three years? Lucas: I think we'll see the yuan's share of global reserves hit 5% by 2028. Maybe faster if the US fiscal deficit keeps widening. And Africa will be a key battleground. China is already the largest trading partner for most African countries. If they can lock in yuan settlement for 30% of that trade, that's a game-changer. Luna: It's one of those stories that seems slow until you look back and realize a lot has changed. Lucas: Yeah. And for investors, it means paying attention to companies that benefit from yuan internationalization — like Chinese banks with CIPS exposure, or commodity traders that can settle in yuan. It's a long-term theme, but it's building. Luna: Alright, that's a solid look at one of the most underreported economic shifts. Thanks Lucas. Lucas: Thanks Luna. See you next time.