* Clearing house to cut need for dollar settlements
* Dealers still prefer dollar to tightly managed yuan
* Indicates Chinese challenge in United States, Europe
NAIROBI, Sept 18 (Reuters) - Kenya wants to host a clearing house for China's yuan currency - a bold African first that would deepen the continent's ties with Beijing, already a big investor from The Cape to Cairo.
Such a venture would not eclipse the dollar in Africa anytime soon, however, because the yuan is tightly managed and traders are wedded to the greenback's flexibility.
Africans can already get quotes for their currencies against the yuan . A clearing house would cut the need for dollar settlements, speed things up and reduce costs.
But the real prize for Kenya, or any other African host, would be the symbolism of being the continent's business gateway with Asia's economic emperor, even if business starts modestly.
Such an exchange would also be the first outside Asia.
Its prospect is a measure of China's challenge to Africa's traditional partners in Europe and the United States and reflects the increasing attractions of a continent with some of the world's fastest growing economies.
"Even if the benefits to business have probably been slightly overblown by diplomats on both sides, I don't think you can understate the symbolic aspect," said Shilan Khan, Africa economist at London-based Capital Economics.
China's ties with Africa have expanded fast.
In 2012, the total volume of China-Africa trade reached $198.49 billion, a rise of 19 percent over the previous year, Chinese government figures show. China accounted for 18.1 percent of Africa's total trade volume in 2012, up from 3.8 percent in 2000.
"The proposal is basically to consider Kenya favourably given that the financial market is deep here," Kenyan Finance Minister Henry Rotich told Reuters in August, citing rivals such as Nigeria, which already holds some reserves in yuan.
South Africa had a financial centre that dwarfs Kenya's and has been mooted as a potential host, though officials there have not said they are pursuing such a plan.
"We are sort of competing and at the end of the day, the Chinese government is the one to decide where this clearing house will be," Rotich said, making his pitch for east Africa's biggest economy which aims to become a financial hub.
Early signals look good for Kenya.
"We are very positive about this clearing house and I think it is very important for Kenya to set up a financial hub here and to process the Chinese currency renminbi," China's ambassador to Kenya, Liu Guangyuan, told Reuters on the sidelines of a conference in Nairobi on Wednesday.
The value of potential business through such a clearing house was still a subject of discussion, he said.
Kenya's daily turnover of foreign exchange is $330 million to $370 million, sometimes rising to $500 million.
Kenya's central bank governor, Njuguna Ndung'u, told Reuters on Wednesday that foreign exchange values could rise with such a clearing house, as it would be designed to serve trade and payments settlements for the region.
A clearing house will allow the renminbi currency, of which yuan is the unit, to become a common settlement currency, and could in future be used for official flows such as bilateral loans or aid now denominated in dollars, experts said.
That means there would be no need to settle in dollars when trading between the Kenyan shilling or African currencies and the yuan, an extra step in any transaction that increases the opportunities for arbitrage and so raises costs.
Highlighting Nairobi's enthusiasm for a clearing house based in Kenya's central bank, President Uhuru Kenyatta made his bid for Beijing's backing during a visit to China in August.
Business between Kenya and China is growing, even if Europe is still a bigger trade partner. Kenya's Equity Bank, for example, has opened a branch in Nairobi for Chinese business executives, complete with Chinese tellers serving them.
"Everyone is trying to clinch a deal to directly clear and settle yuan transaction with the People's Bank of China," said an official at a Chinese state think-tank that often advises Beijing on policy, speaking about Africa's clearing house plans.
Settling in yuan on the continent would mirror developments in Asia, where there are already yuan clearing houses in Singapore, Taiwan and the Chinese territory of Hong Kong.
The official said London's clearing house was not completely up and running, as it still cleared trades through Hong Kong.
"So if any region builds up the infrastructure in future, it would be a leap for the plans for offshore renminbi centres," said the official, declining to be named due to sensitivities surrounding Chinese currency policy.
Alongside South Africa, he suggested even Tanzania, a far smaller economy with longstanding ties with Beijing, had been spoken of as a possible site, though he said he believed South Africa might be best suited in Africa.
Both those nations were stops on a tour of Africa by Chinese President Xi Jinping in March, soon after his appointment. That trip underscored China's focus on Africa, building on an aid programme that has funded new airports, roads and railways.
In the bid to deepen economic links, oil exporter Nigeria has gone a step further by switching part of its reserves to yuan. It now holds about $500 million of its $47 billion reserves in the Chinese currency, an official said.
But even as Africa starts shifting more business east, the hegemony of the dollar seems assured for now. For a start, the minerals and oil China buys or extracts from Africa to fuel its growth are priced in dollars.
African dealers also say a deterrent to building more business in yuan is that the currency is carefully controlled, trading 1 percent either side of a mid-point set by China's central bank each day, even if the grip is starting to ease.
"Unless it is liberalised, you may see a lot of traders preferring to use the U.S. dollar," said a senior treasury dealer a commercial bank in Nairobi, who did not want to comment publicly until he had seen more details on the business case.
But the combination of rising business dealings with China and Beijing's policy of slowly liberalising the renminbi was building the case for a clearing house in Africa.
Chris Kirubi, a Kenyan business executive and property developer who joined Kenyatta's delegation to China in a search for partners, said steps to tie Africa's economies more closely to China could only be welcomed.
"I believe China is going to be our catalyst for development and to bring in other investors from the rest of the world."