Experts have expressed fear about the new agreement signed by Nigeria to include China’s currency, Yuan in its foreign reserves. While they envisage many opportunities as result of the agreement, they hold several reservations. One reason for this is because China is investing in US treasury and are the largest purchaser of US treasury.
They are also wary because China recently devalued its currency and the market reacted with heavy loss.
They also fear that since China is a communist society, government dictates what happens and has total control on capital inflow and outflow, a phenomenon which may impact negatively on foreign reserves. This also makes the Yuan unpredictable and China will not hesitate to weaken it to increase its exports.
On the part of Nigeria, experts think the move is a bit hasty and the move to change the mix of the reserve has not been well thought out.
Currently, there is a large trade imbalance between China and Nigeria.
“The Chinese use Nigeria as a dumping ground for goods that would not be allowed into the US and they are rewarded for that by adding them to the reserve portfolio mix,” an expert said.
It is also speculated that the US and other investor may not be comfortable with the move. That may increase outflows and cut the confidence level of foreign investors in the Nigerian economy.
However, the agreement remains one of the major achievements of President Muhammadu Buhari in his ongoing visit to China.
Apart from further cementing ties with China politically and economically, the agreement which was signed during a ceremony in Beijing on Tuesday makes Nigeria the first African country to make such moves.
The signing was overseen by presidents Xi Jinping and Muhammadu Buhari. Six other agreements were also signed.
The ultimate goal of the agreement is to strengthen the naira. It will allow Nigerian traders and businesses, which imports mainly from China to conclude their transactions in the Chinese currency, the Renminbi (Yuan), instead of the dollar.
This means, Nigeria-China trade will be concluded without having to use the dollar. More than 70 percent of the total imports in to Nigeria are accounted for by the Nigeria-China trades.
Before the agreement, close to 95percent of international trades between Nigeria, which imports almost all it needs from the West, Middle East and Asia, and the world is done in dollars. This puts a lot of pressure on the naira.
The CBN is expected to diversify a huge chunk of Nigeria’s foreign reserve from the dollars to the Yuan to perfect the agreement.
“It means that the renminbi (Yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria,” Lin Songtian, director general of the African affairs department of China’s foreign ministry, told reporters in Beijing a few minutes after the agreement was signed between the Governors of the nations’ reserve banks in the presence of President Buhari and President Xi Jingping of China, who is hosting Buhari and top Nigerian officials to a state visit.
Lin said a framework on currency swaps has been agreed with Nigeria, making it easier to settle trade deals in Yuan. China has signed currency swap deals with countries ranging from Kazakhstan to Argentina as it promotes wider use of its Yuan.
Being the only African country with the agreement, Nigeria would now become the clearinghouse for Yuan denominated transactions for the whole of Africa following the agreement.
China has poured investment into the continent as it has sought raw materials to fuel its booming economy. It became Africa’s largest trading partner in 2009.
But as its growth slowed, Chinese investment declined, falling more than 40 percent in the first half of 2015 due to reduced demand for commodities such as oil, iron ore and copper.
China is Nigeria’s second largest trading partner, Lin said, and its third largest source of investment.
No specific agreements concerning Nigeria’s budget woes were announced.
But Lin said Nigeria could propose projects to receive funding from a $60 billion package China announced at the Johannesburg summit of African leaders attended by Xi in December.