It has been an eventful month for the renminbi.
From Lagos, Nigeria, where the central bank announced plans to diversify as much as 10 per cent of its $35bn foreign reserves into renminbi, to London, where banks are looking to transform the city into an offshore trading hub for the Chinese currency, the redback is finding a growing chorus of supporters.
While few expect it to replace the greenback anytime soon, there’s no denying that China’s drive to internationalise its currency is steaming ahead much faster than forecast.
Nigeria’s punt on the renminbi is a case in point.
Its foreign reserves are 79 per cent dollars with the rest largely held in euros and Swiss francs. While the sum being shifted into renminbi – up to $3.5bn – is not huge for a country that chalked up $82.54bn in exports last year, the move is symbolic given that the country’s main export – oil – is dollar-denominated.
As Lamido Sanusi, Nigeria’s central bank governor told Bloomberg:
Confidence in China doesn’t mean lack of confidence in America. Europe and America will continue to be important parts of the world. Having said that, it will be almost living in a dream world to ignore China. It’s the second-largest economy in the world and it’s well-managed.
…There’s no reason, based on history, why we cannot for instance receive renminbi for our sales of oil to China.
Over the past decade, China has become an increasingly important trading partner for Nigeria, Africa’s third largest economy and leading oil producer. According to Rong Yansong of the Chinese embassy in Abuja, trade and investment between China and Nigeria is worth $8.2bn and could reach $10bn by the end of this year. China has agreed to spend up to $23bn to build oil refineries and other petroleum infrastructure in Nigeria.
To be sure, the US remains Nigeria’s biggest investor and trading partner. (The value of US-Nigeria trade in 2010 was about $34.6bn and US direct investment in Nigeria in 2009 was about $5bn, mostly in the oil sector.)
But with the US mired in its own financial difficulties, Nigeria is no doubt looking to ensure that the flow of investment and cheap loans from China continue.
As Sebastian Spio-Garbrah, managing director of DaMina Advisors, a frontier-market risk adviser, wrote in a note:
While Nigeria’s current bilateral trade with China is much smaller than its US dollar trade in oil, the China-Nigeria trade numbers are expected to grow in coming years.
Sanusi’s actions underscore a growing problem that all central banks in Africa and other major emerging markets will face in the coming years as their trade with China increases. More African countries are expected to follow Nigeria’s lead in coming months – probably Angola, Algeria and South Africa.
Meanwhile, Standard Bank reckons that at least $100bn or 40 per cent of China’s trade with Africa will be settled in renminbi by 2015. In addition, the bank also believes that $10bn of Chinese investment into Africa will be denominated in renminbi in four years’ time.
From Standard Bank:
We estimate around 1, 500 Chinese firms are operating in the 18 African nations which Standard Bank has operations. And there are as many as one million Chinese people in Africa. Firms will want to grow their businesses in Africa, open renminbi accounts and use renminbi products; workers will want to send money home.
That’s all well and good. But the reality is that when it comes to adopting the renminbi as a reserve currency or a currency for trade settlement, obstacles still stand in the way.
1 – Convertibility – For all the speculation about the renminbi being fully convertible by 2015, until that day actually comes, China’s capital controls means central banks are taking a risk in investing part of their hard-earned reserves in a currency that is not fully convertible. If ever there was a run on the Nigerian naira and the central bank needed its reserves to defend it, it might rue putting $3.5bn into a currency that it cannot sell.
2 – Exporters – For exporters, the main benefit of using the renminbi would be to lower foreign exchange costs by removing the need to convert every transaction into dollars, as at present. But for as long as oil and other goods continue to be priced in dollars, it’s hard to see why exporters would want to settle in the renminbi – unless Chinese buyers are willing to pass on some of the potential savings in transactions costs in the form of higher prices.
3 – Importers – Nigeria’s importers of Chinese goods might be reluctant to pay in renminbi as the Chinese currency is expected to appreciate over time. This goes back to the one-way trade dilemma. If importers are not earning renminbi from exports, there is little incentive to settle in renminbi given that importers would have to pay ever more to obtain renminbi – that is unless Chinese exporters are willing to pass on some of the potential savings in transactions costs in the form of lower prices.
According to Renaissance Capital, China is one of Nigeria’s largest sources of imports and a hub for Nigeria to re-export Chinese consumer goods to the rest of Africa. “There is a substantial Chinatown in Lagos, consisting of approximately 120 shops that sell Chinese consumer goods, imports and products manufactured by Chinese firms in Nigeria,” its says in a report.
All this makes Nigeria’s move to include the renminbi as part of its reserves one to watch. And Nigeria is not the first to dip its toes into the renminbi reserve waters. Countries from Iceland to South Korea already hold renminbi as part their reserves thanks to a series of bilateral currency swaps. It probably won’t be the last. For all the logistical hurdles, the Philippines’ finance secretary Cesar Purisima said this month that buying renminbi may be “prudent”.
The renminbi internationalisation boat might not be a fast one. But it seems like it is one that no countries want to miss.
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