Nigeria plans to reach a target of holding 10 percent of its foreign-exchange reserves in yuan “as soon as possible,” said central bank Governor Lamido Sanusi.
The nation plans to start holding the Chinese currency next quarter, predicting it will appreciate given the strength of China’s economy, Sanusi said today in an interview in Hong Kong, adding that the target was set more than a year ago. He said the yuan will “inevitably” become a reserve currency and that increased convertibility outside China had boosted its appeal.
The $32 billion in Nigerian reserves are now 79 percent held in U.S. dollars, with the rest largely in euros, Swiss francs and British pounds. Asia’s central banks are also diversifying their growing reserves into yuan debt. Philippine Finance Secretary Cesar Purisima said on Sept. 3 that buying yuan may be “prudent.”
“Confidence in China doesn’t mean lack of confidence in America,” Sanusi said. “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.”
The yuan, a denomination of the renminbi, was the biggest gainer in August among Asia’s 10 most-used currencies excluding the yen, having advanced 0.9 percent versus the dollar as Standard & Poor’s downgrade of the U.S. credit rating and a rout in global equities prompted investors to pull back from riskier assets.
Yuan for Oil
The foreign-currency reserves of Africa’s biggest oil producer slid 11 percent to $32.3 billion in the year to Sept. 2, according to data from the Abuja-based Central Bank of Nigeria. Nigerian benchmark Bonny Light crude gained about 51 percent in the same period. The country relies on crude exports for 95 percent of its foreign-exchange earnings.
Nigeria may accept yuan payment for China’s oil purchases in the country and that could be one of the ways to build up the central bank’s yuan holdings, Sanusi said.
“There’s no reason, based on history, why we cannot for instance receive renminbi for our sales of oil to China,” he said. Bilateral trade between China and Nigeria was a record $7.5 billion last year.
“While Nigeria’s current bilateral trade with China is much smaller than its U.S. dollar trade in oil, the China-Nigeria trade numbers are expected to grow in coming years,” Sebastian Spio-Garbrah, managing director of New York-based DaMina Advisors LLP, a frontier-market risk adviser, wrote in a report to clients today.
“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,” Spio-Garbrah wrote. “More African countries are expected to follow Nigeria’s lead in coming months -- probably Angola, Algeria and South Africa.”
Nigeria’s central bank has been intervening to keep the naira within a 3 percentage-point band above or below 150 per dollar to help check inflation. Sanusi said the growth outlook for Nigeria is “robust” and that he doesn’t see a big decline in oil prices. He said he is determined not to let inflation get out of control and that the August rate was probably the same as July’s 9.5 percent and below 10 percent.
He also visited Beijing, where he signed a memorandum of understanding with China’s central bank to foster cooperation. Sanusi said he plans to seek a swap agreement with China and a license to buy bonds in Shanghai’s interbank market. He said he prefers holding yuan over gold in his nation’s reserves.
Central banks in Hong Kong and Thailand won approval this year to trade in China’s interbank bond market. The Hong Kong Monetary Authority received a quota to invest in China, Chief Executive Norman Chan said June 24. The Bank of Thailand can buy as much as 200 million yuan of debt denominated in China’s currency, Chairman Chatumongol Sonakul said Feb. 24. China issued draft guidelines in August for foreign direct investment in the country using yuan raised offshore.