A currency revolution is brewing on the African continent. Fifteen West African countries have decided to issue a unified currency, Eco, by 2027, replacing the multiple currencies currently circulating in the region. The plan aims to promote regional trade and economic growth, reduce France's influence on CFA-speaking countries, and increase the voice of the West African region on the international stage.
At the same time, the renminbi is undergoing historic changes. In recent years, the exchange rate of RMB against the US dollar has shown a steady and rising trend. Some experts predict that in the next few years, the exchange rate of the yuan against the US dollar may reach 11. If these two events happened at the same time, what impact would they have on the world economy? What about the relationship between China and the 15 West African countries in particular?
I. The impact of the unified currency on 15 West African countries
Plans to issue a unified currency, Eco, by 15 West African countries, have been years in the making. These include Benin, Burkina Faso, Cape Verde, Côte d'Ivoire, the Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo.
Together, they make up the Economic Community of West African States, with a total population of about 385 million, or nearly one third of Africa's total population. Currently, eight of these countries use the CFA franc, the CFA franc, the CFA franc, which is pegged to the euro, backed by France, and seven use their respective currencies.
This diversified monetary system imposes many obstacles and costs for intraregional trade and investment. Therefore, these countries hope to achieve regional integration through the issuance of a single currency, enhance economic competitiveness and withstand external shocks.
2. The possibility that the exchange rate of the renminbi against the US dollar is 11
The exchange rate of the renminbi against the US dollar is an indicator of global concern, which reflects many factors such as China's economic strength, foreign trade conditions, and the degree of openness of financial markets.
In recent years, the exchange rate of RMB against the US dollar has shown a steady and rising trend, from 6.88 RMB to USD 1 at the end of 2018 to RMB 6.23 USD in April 2023, a cumulative appreciation of nearly 10%. Some experts predict that in the next few years, the exchange rate of RMB against the US dollar may reach 11, that is, 1 US dollar to 11 yuan. This will be the highest level since 1994 after the reform of the renminbi exchange rate system.
China's economy has shown strong resilience and resilience to the impact of the pandemic, achieving a growth rate of 6.8% in 2022 and is expected to reach 7.2% in 2023. China's economy is transforming from an export- and investment-driven to a consumption and innovation-driven economy, boosting domestic demand and production efficiency, and increasing the attractiveness and stability of foreign exchange.
The U.S. economy has fallen into a deep recession under the impact of the coronavirus pandemic, achieving growth of only 1.6% in 2022 and is expected to fall to 0.8% in 2023. In order to respond to the epidemic and stimulate the economy, the US government has greatly increased fiscal spending and debt, which has led to oversupply and depreciation pressure on the US dollar, reducing confidence and demand for foreign exchange.
In recent years, China's financial market has continuously opened up to the outside world and deepened reforms, relaxed restrictions on the entry and exit of foreign capital, improved the diversity and competitiveness of financial products and services, and increased the interest and holdings of international investors in China's financial assets. This is conducive to increasing the internationalization and influence of the RMB, and improving the flexibility and marketization of the RMB exchange rate against the US dollar.
US monetary policy has taken extremely loose and innovative measures during the pandemic, including lowering the federal funds rate to near zero, implementing a massive quantitative easing and credit guarantee program, and providing ample liquidity and credit support to the market.
While these measures have helped ease the crisis, they have also led to higher inflation expectations and increased risks of dollar depreciation, undermining the dollar's attractiveness as a safe-haven currency.
The possibility of the yuan trading at 11 against the dollar is not impossible, but it is not very large. Because in addition to these factors, there are many other factors that affect the exchange rate trend, such as the global trade environment, geopolitical risks, market psychological expectations, etc.
3. The impact of the exchange rate of RMB against the US dollar11
Assuming that the renminbi does reach 11 against the dollar, what impact will this have on the world economy? What about the relationship between China and the 15 West African countries in particular?
An appreciation of the renminbi has mixed benefits and disadvantages for the Chinese economy. On the one hand, the appreciation of the renminbi can reduce the cost of imported goods and raw materials, improve the purchasing power of domestic consumers, promote domestic demand and consumption upgrading, ease inflationary pressure, increase the value of foreign exchange reserves, and improve international credibility.
On the other hand, the appreciation of the renminbi will also increase the price of export commodities, reduce export competitiveness, affect the profits and employment of export enterprises, aggravate trade frictions and protectionism, and increase capital outflow and financial risks.
The appreciation of the renminbi also has advantages and disadvantages for the 15 West African countries. On the one hand, the appreciation of the renminbi can reduce the cost of China's investment and assistance to the 15 West African countries, improve the efficiency of infrastructure construction and development assistance in the 15 West African countries, promote economic growth and social stability in the 15 West African countries, and increase cooperation and mutual trust between the 15 West African countries and China.
On the other hand, the appreciation of the renminbi will also increase the cost of imported goods and services to China by the 15 West African countries, reduce the export competitiveness of the 15 West African countries, affect the trade income and foreign exchange reserves of the 15 West African countries, and aggravate the fiscal deficit and debt burden of the 15 West African countries.
epilogue
Both of these events are significant and impactful monetary transformations that will have a profound impact on the world economic landscape. Especially for the relationship between China and the 15 West African countries, they will bring both opportunities and challenges, and require the joint efforts of both sides.
Finally, we can ask a broader and deeper question: in the age of globalization, is money still a mere medium of exchange, or a symbol of political, economic and cultural significance?