The recent
visit of Nigeria’s President Muhammadu Buhari to China at the
invitation of Chinese President Xi Jinping, has led to improved
cooperation between the two countries. One of the main deals reached
between the two countries was the Renminbi (Yuan) reserve deal which
will allow the Central Bank of Nigeria (CBN) to build up Chinese Yuan
reserves as against the dependence on dollar dominated reserve. Our
reporter observes the implication of the currency deal.
Nigeria and the Peoples Republic of China established formal diplomatic relations on February 10, 1971. Relations between the two nations grew closer as a result of the international isolation and Western condemnation of Nigeria’s military regimes (1970s-1998). Nigeria has since become an important source of oil and petroleum for China’s rapidly growing economy and Nigeria is looking to China for help in achieving high economic growth. China has provided Nigeria with extensive economic, military and political support.
Nigeria and the Peoples Republic of China established formal diplomatic relations on February 10, 1971. Relations between the two nations grew closer as a result of the international isolation and Western condemnation of Nigeria’s military regimes (1970s-1998). Nigeria has since become an important source of oil and petroleum for China’s rapidly growing economy and Nigeria is looking to China for help in achieving high economic growth. China has provided Nigeria with extensive economic, military and political support.
The visit also witnessed the signing of several deals on cooperation. One of the key deals signed was the currency swap agreement which allows importers of goods from China to conclude their transactions in the Chinese currency, the Renminbi (Yuan), instead of the dollar.
From a lowly $2 billion in 2002, the volume of bilateral trade between Nigeria and China grew to a yearly $14.9 billion, with prospects of further growth going forward. The trade between Nigeria and China accounts for nearly one third of the trade between China and West Africa.
Mr Zao LingXiang, the Economic and Commercial Counsellor of the Chinese Embassy in Nigeria, said: “Nigeria’s trade figure is 8.3 per cent of China’s total trade volume, and 42 per cent of the total trade volume between China and Africa.”
The currency swap deal with China is developing so much excitement within the business community in Nigeria because prior to this agreement, every trade transaction between these two nations have been consummated in the US dollar.
The current fall in the international price of crude oil which accounts for over 70 per cent of our foreign exchange has taken its toll on the central bank’s ability to meet the ever growing demand for the dollar.
The CBN, in a desperate move to curtail drastic depletion of the nation’s foreign exchange ($28 billion), excluded some 41 items from accessing forex from the government’s official window. These measure did not stem demand as pressure from dollar seekers led to a free fall of the Naira at the parallel market. The Naira currently sells for around N325 to the dollar.
Experts and traders have hailed the currency swap deal as a strategic response to the intense demand for the dollar in the parallel market.
Feyi Fawehinmi, a senior investment accountant at Friends Life UK, said: “For a number of years now, the Chinese have been entering into these swap agreements with various countries on a country by country basis. The swaps typically last for three years after which they are renewed and/or increased. As an example, in 2012, the UK signed a swap agreement for Y200bn with China. In 2015, it was extended and increased to Y350bn.”
Fawehimi said: “CBN approaches the Peoples Bank of China (PBOC) and asks to set up a swap. Xe.com tells me that 1 Chinese Yuan is currently worth about N30. So for the sake of simplicity, let’s say CBN offers to swap N30bn for Y1bn. Both of them agree an exchange rate on the day of the swap (N30 to Y1) and they make the transfer.
“The people who want to buy stuff from China can face their Yuan squarely while the dollar people face their dollars. At least, we get to know who is who. All of this is, of course, conditional on the amount of Yuan being swapped.”
Daniel Ikhuoria, a development researcher who spoke exclusively with Daily Trust, describes the swap deal as the smartest move by this administration.
“We will get goods cheaper at almost the equivalent of the official rate of the dollar to the Naira, we will eliminate currency speculators and the CBN can deal directly with genuine importer and all such transactions can now be formally captured with the use of ‘form- M,” he said.
“Another positive from this development is that the inflation we are currently witnessing will also drop because it was fuelled by speculative buying.”
Consumer prices in Nigeria increased 12.8 per cent year-on-year in March of 2016, following a 11.4 per cent jump in the previous month. It was the highest figure since July 2012, mainly boosted by food prices.
Importance for trade
According to a 2014 BBC World Service Poll, 85% of Nigerians view China’s influence positively, with only 10% expressing a negative view, making Nigeria the most pro-Chinese nation in the world.
The national president of the National Association of Nigerian Traders (NANTS), Barrister Ken Ukaoha, said: “No sensible person will kick against this deal by the president and the CBN because as at today, 82.7 per cent of our trade activities is with the Asian Tigers and 79.2 per cent of that value is with China.
According to Ukaoha, transporting one 20 feet container costs about €850 (euro’s) from Hamburg, Germany, to Nigeria. A similar container costs about $1,300 ( one thousand three hundred dollars) from China but with the new swap arrangement, it will cost of €780. He, however, added that while it takes two weeks to ship from Europe, it takes about three weeks from China.
Fawehinmi said: “First of all, it appears that the swap Nigeria entered into was with the Industrial and Commercial Bank of China (ICBC) - the world’s largest bank by assets. That is, the CBN is not dealing with the PBOC but with a ‘private’ Chinese bank (ICBC is owned by the Chinese government).
“Why was the swap signed with ICBC and not PBOC? How much is being swapped and for how long? And, what is the interest rate to be paid? (We can assume the CBN initiated the swap and will be the one to pay interest on the Yuan it receives). How will the Yuan market be priced? Will it be another ‘official’ and parallel rate mess like we currently have with the dollar? This is a tricky question because, if it is market priced, we shall have plenty of fun with the contradictions in pricing the dollar ‘officially’ and the Yuan by the market.”
Ikhuoria also raised a concern with the arrangement in the long run as he argues that this is a master stroke for the short to medium term.
Indonesia, United Kingdom, Hong Kong, South Africa, Malysia, Thailand, Pakistan and the European Union (EU) have currency swap deals running in several hundreds of billion.
The International Monetary Fund (IMF) has added the yuan to its basket of reserve currencies, an international stamp of approval of the strides China has made integrating into a global economic system dominated for decades by the U.S., Europe and Japan. The addition will take effect October 1, 2016, with the yuan having a 10.92 per cent weighting in the basket, the IMF said. Weightings will be 41.73 per cent for the dollar, 30.93 per cent for the euro, 8.33 per cent for the yen and 8.09 per cent for the British pound. The dollar currently accounts for 41.9 percent of the basket, while the euro accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.
Worries for manufacturers and regulatory agencies
The “flooding” of Nigerian markets with cheap Chinese goods has become a sensitive political issue, as-combined with the importation of second-hand European products-it has adversely affected domestic industries, especially in textiles, and led to closure of 65 textile mills and the laying-off of 150,000 textile workers over the course of a decade.
Standard Organisation of Nigeria (SON) has continually cited non-cooperation from the Chinese standard regulatory body as the reason for the continuous influx of fake and substandard Chinese products into Nigeria.
Reacting to concerns over the unabated influx of fake and substandard products into the country, Barrister Umaru Kawu, the Director of Legal, Services of SON, said that several discussions with the Chinese authority remained deadlocked since 2007.
Kawu said: “In our discussion, we demanded that all exports from China should carry certificate of free sail, which presupposes that the same goods can be sold in China, they declined, and these raises ethical question about allowing a company to produce what is below an acceptable standard in your country’’.
Experts believe that if these concerns are not adequately addressed, the gains from the currency swap deal will only be an impetus for Nigeria to become a dumping ground for fake China products.
Read more at http://www.dailytrust.com.ng/news/business/how-the-yuan-currency-swap-matters/142811.html#VXBqyFVllLfg0YMF.99
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