When it comes to geoeconomics, China knows how to
play it. First it was all about how to convert US Dollar surplus into BRI loans
given to many developing nations. Now China is engaged in converting the same Dollar
loan as Yuan debt. Expectedly, they are succeeding in this strategy. Details:
About 43 countries in Africa have received loans
from China under the BRI scheme. More than 1.3 Trillion US$ has been given to
these countries for the purposes of constructing infra-structure in roads, railways,
ports, energy, telecom and other sectors. The top billing in Africa goes for Angola,
Ethiopia, Egypt, Kenya and Nigeria. Funds were channelled thru China Development
Bank & China Exim Bank.
By this strategy, China found useful outlet for her piling US Dollar
surplus gained thru massive trade surplus. China had two options either buy
gold or invest in long term partnership with the developing world especially in
Asia, Africa and Latin America. The bulk of these funds went onto the Dark
Continent. By this astute strategy excess Dollars were suitably employed.
Whenever partners found it difficult to service the
debt, China offered various
concessions including interest waivers, moratoriums on interest and re-scheduling
of capital instalment. But the devil is in details. These loans need to be paid
in US Dollar which burdened the partners as there was not enough Dollars in
their hands.
Chinese know how
to do business! A new via operandi has to be found that seeks the
following broad strategic objectives:
1) Genuinely help the partners to come out of the grid-lock
2) Reduce the use of US$ as medium of exchange
3) Weaken the US$ in international trade
4) Enhance the status & value of Chinese Yuan
as trading & investment currency
Loan Currency Swaps
is the ideal instrument that can bring out a tectonic shift in the way loans
are structured and facilitate their smooth repayment. Loan Currency Swap achieved the following goals:
1) Reduce the need for US$ drastically by converting Dollar loan to Yuan loan
2) The use of US$ is lessened and the use of yuan enhanced
3. Connectedly, interest cost goes down as interest payable in US$ is much higher than in the case of Yuan denominated loan
4) Central Banks in the partner countries can reduce quantum of their Dollar holdings and thereby reducing the cost of such holdings
5) Partners get more Yuan by exporting to mainland China or to other countries when they bill in Yuan
6) in the case of partners who are unable to source
sufficient Yuan, China offered a
concession that they can pay it in kind, in the form of minerals, rare earths and even other natural resources
Recent example of China converting 3.5 Billion US$
loan granted for Kenyan Railway into Yuan denominated one help Kenya saving almost
215 Million US$ as Dollar interest burden.
The loan currency swap is the master stroke in “strategy amid geoeconomics”. China achieves dual objectives: Dollar down & Yuan up!
Cheers!
Muthu Ashraff Rajulu
Strategy Adviser
Mobile: + 94 777 265677
E-mail: cosmicgems@gmail.com
Blog: Strategy Adviser
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