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China’s CBDC could be trade currency of choice in AfCFTA

China’s Central Bank Digital Currency (CBDC) or digital yuan could serve as a valuable intermediary currency within the African Continental Free Trade Area (AfCFTA), which came into effect in January 2021.

This is according to Fintech and China expert Richard Turrin, author of ‘Cashless’ and ‘Innovation Lab Excellence’.

Turrin believes China’s CBDC will be used in trade between China and 140 countries which have committed to the Belt and Road Initiative (BRI) as at 1 January 2021 – forty of which are in Sub-Saharan Africa.

The BRI is a state-backed campaign to drive China’s global dominance through an infrastructure and investment plan worth over US$1.5-trillion over ten years. AfCFTA unites about 1.3 billion people in a US$3.4-trillion economic bloc.

The BRI connection to export manufacturing to Africa through the AfCFTA free trade area could see the CBDC being used within 54 of the 55 African Union (AU) states that had signed the agreement as of July 2019, with the exception of Eritrea.

Turrin explains that low-cost manufacturing is already leaving China for Vietnam, among others, and African countries are next on the list, adding that the BRI is building infrastructure to support trade with AfCFTA countries which are also reaching out to China for more as their largest trading partner.

He notes that the digital yuan’s advantages of immediate transfer, low cost and high convenience will be hard to resist and the next likely move will be for China to start using the digital currency to trade directly with other holders of the CBDC, once officially launched.

“As AfCFTA will bring about trade between countries with different currencies, it is likely that they will use an intermediary to value trade,” Turrin said. “The US Dollar serves this role right now and it is possible that because of the CBDC's fast digital payment, China's digital currency could be used in this way.”

Since 2020, the CBDC has been tested in major Chinese cities including Beijing and by the country’s top four banks.

Last week, the digital currency arm of China’s central bank entered into a joint venture with global financial service provider SWIFT in a move market insiders say is meant to globalise CBDC’s reach.

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