News Column

China - U.S. Currency War Comes to Uganda

May 27, 2014

Alon Mwesigwa

The currency war is far from over. China's influence in the global trade arena, where it is one of the biggest exporters of commodities, has seen the Asian country go on a charm offensive, calling on trade partners to consider its currency, the renminbi, as a separate trade currency from the United States' dollar.

Last week, Chinese officials were in Uganda to make a similar call. People's Bank of China (PBC) Governor Dr Zhou Xiaochuan held a meeting with Bank of Uganda, where the Asian officials made a case for the renminbi as the two nations deepened trade relations. A statement from Bank of Uganda pointed out: "The discussions centred on, among others, current reforms that have contributed to increased convertibility of the Renminbi in international commodity and financial markets, and ways of fostering correspondent-banking arrangements and other modes of payments systems between China and Uganda."

The statement added that "In addition, the meeting discussed the possibility of direct quoting of China-Uganda exchange rate and settling of international transactions in the Chinese currency, Renminbi."

Over the last 10 years, foreign exchange management in China has been transformed extensively, leading to lifting of restrictions on the use and international settlement of the Renminbi and making the currency fully convertible.

The developments are expected to get on the United State's watch; the US is one of the biggest donors to Uganda. The United States continues to complain that China intentionally devalues its currency to boost its exports. This, the US argues, is playing unfair in international trade. The dollar is considered the main international trading currency.

Economic growth:

Louis Kasekende, the deputy governor Bank of Uganda, supports China's management of its currency. He said: "Third lesson I would like to draw from China is the maintenance of a competitive real exchange rate that supported export-led growth. An undervalued exchange rate that increases the size of the tradable sector would stimulate economic growth."

China has not been moved by how the United States feels. Instead, the Asian country continues to push for more use of its currency, and Uganda appears to be among the latest countries to agree to China's demands of trading in the Renminbi.

The Bank of Uganda statement added: "These arrangements [of settling of international transactions in the Renminbi] once finalized are expected to further ease trade between the two countries and support investment in Uganda as it endeavours to become a middle-income economy."

According to the Investment Abstract for financial year 2012/2013, a report by the Uganda Investment Authority, China had the biggest amount of Foreign Direct Investment (FDI) to Uganda, totalling $359 million. China alone accounted for two fifth of the total planned FDI in 2012/2013. China made large investments in the mining and quarrying sector, plus in the manufacturing industry. Total FDI to Uganda in 2012 was a record $1.72 billion.

Kasekende said China had become a valuable trade partner for Uganda, which is another reason to harness relationship ties between the two countries.

"[It] is evidenced by the increasing bilateral trade between the two countries, project aid, and the significant investments by the Chinese government in the areas of infrastructure development such as road construction, hospitals, railway, electrical power and communications, and oil," Kasekende said.

China continues to see Uganda as a lucrative country to invest in.

"We see huge potential here. The reforms and economic potential in Uganda is huge for us," Xiaochuan said.

"We sincerely hope for economic trade. The central bank [PBC] and the whole financial sector should support that relationship development."

It was Xiaochuan's first visit to Uganda since he became the governor in 2002. He was on his way to Kigali for the 2014 African Development Bank general meeting. He signed a pact with the AfDB for a $2bn fund to be accessed by African countries.


Already, China is helping Uganda undertake mega infrastructural projects, including the 600MW Karuma dam and the Entebbe express highway. China National Offshore Oil Corporation (Cnooc) is also heavily engaged in Uganda's oil and gas sector. Government is in talks with two Chinese firms to help fund the Standard Railway Gauge (SRG). By the end of July, Uganda is expected to have contracted a company, and work should have started by October.

The East African newspaper reported at the weekend that Uganda was to negotiate with the China Harbour and Engineering Corporation (CHEC) and the China Civil Engineering and Construction Corporation (CCECC) for construction of the northern and western sections of the railway respectively. Meanwhile, Xiaochuan applauded Bank of Uganda for managing the economy and financial sector well.

"I congratulate Bank of Uganda for the good monetary policy. You managed to bring inflation down and you have had very good supervision of the financial sector," Xiaochuan said.

In 2011 when inflation hit the highs of 30.5 per cent, BOU adopted a new monetary policy called Inflation Targeting Lite (ITL), which has brought inflation to the central bank's target of five per cent. The banking sector remains sound although credit to the private sector has remained slow due to fairly high interest rates in the market.

Kasekende said Uganda could learn a lot from the way Beijing has progressed over the years. He said Uganda could look up to the steady and robust growth China has had for two decades and remarkable progress in poverty reduction.

Particularly, Kasekende said, Uganda can learn from the way China controlled the total fertility rate in the country, which has contributed to more than 30 per cent of China's total economic growth.

"China cut its total fertility rate to slightly under two children per woman and, as a result, was able to reduce the age dependency ratio to only 36 per 100 workers," Kasekende noted.

"In contrast, Uganda has a total fertility rate and age dependency ratio of 6.1 and 104, respectively, among the highest levels in the world," he added.

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Source: AllAfrica

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