Can The Chinese Accept A Renminbi? By Nasiru Suwaid
Since the visit to China by President Muhammadu Buhari (PMB) with a very powerful team, to sign a lot of bilateral business agreements, many have questioned the deal, which would turn Nigeria into a general hub for the exchange of Chinese currency, the Renminbi in West Africa. First, they questioned the fact that it was the Industrial and Commercial Bank of China (ICBC), the largest bank in the world, which firstly announced the deal, but for credibility sake, should it have been otherwise, when it is an agreement that is yet to reach conclusion, talk less of implementation, mind you, currency deals for monies that have not yet attained full international convertibility, must be highly technical and thoroughly tasking, thus requiring proactive aptitude to cover all fronts before implementation.
Then quickly upon the announcement of the deal or rather, the pronouncement of intent to enter in such an agreement, instead of the need for a little bit of patience, to wait for the production and presentation of the signed deal, to peruse, analyze or even legitimately criticize. It was a section of the public financial commentariat, which segmented, defined and proclaimed what was agreed with the Chinese, as a classic currency swap deal; a traditional currency exchange agreement for a short duration of time.
But, the question that immediately comes into the front burner of public examination of an evolving commercial deed was why should a currency swap deal, an exchange of a national legal tender, be with a private commercial entity, in the instance the Industrial and Commercial Bank of China (ICBC), instead of the People’s Bank of China (PBC), the Chinese central bank.
In fact, whether it is even right or proper, for the Central Bank Nigeria (CBN) to enter into such a deal, with any bank that is not a national bank, the question though is whether the Industrial and Commercial Bank of China (ICBC) is not completely owned by the Chinese government. The simple truth about the reality in the whole deal, is that the Chinese currency swap agreements is an evolving process in financial engagement with the outside world, which the second largest economy in the world is experimenting with, as a route and avenue for the international convertibility of its local currency, the Renminbi.
The duration of earlier currency swap agreements, were shorter in time, involving smaller amounts of monies and mostly in trial and error basis but most significantly, it was always done with the People’s Bank of China (PBC), the Chinese central bank, but later swap deals are proving to be different.
A simple poser to deeply ponder here, is how can a currency that is seeking for international convertibility, like the Yuan, be confined by bounds of trust and acceptability, to only the public and apex national banking institutions, when international commercial trade is mostly controlled by private commercial banking entities.
However, the most pertinent and important question, which has been asked about the agreement, was whether the Chinese citizenry and business persons, would even accept a trading proposal that is not quoted in the United States of America Dollars, as anyone remotely familiar about trading with the Chinese, knows and knew that they only accept buying quotations in Dollars and it is also the only currency they accept its payment vouchers.
In that instance, how could any currency swap agreement, which enables a Nigerian business person to pay in Yuan, be effectively implemented against a private Chinese business individual, to make him or her accept payment in Renminbi, when they are already used to concluding such deals in Dollars and would most gladly prefer the American currency, over their own local currency. This answer is also simple as it is complicated, as it concerns the general Chinese economy and in fact, the global trading business.
It is worth noting that the economy of China is in a slowdown, with its Gross Domestic Product (GDP) coming to a lower 6% percentage point, but, it is not because the Chinese produces less in industrial production, rather, it is because of lack of capacity to buy from them, principally, due to lower commodity prices afflicting economies of developing countries in the third world.
Thus, it is within this context of cyclical effect in the world economy, where lower prices in commodity products means lesser income for countries partaking in international trade, which resulted in Supply Side Capacity for Chinese industries and most importantly, caused the availability of huge inventories that needed to be sold in international market. The Supply Side Reform of their government entails selling the inventories to acquire the Renminbi, pending which a trader could exchange the Yuan for the much coveted American Dollar, because, it is much financially better and more economically wiser to sell a finished product, than to wait for buyers unable to access the American Dollar for trade.
But, what has that got to do with Nigeria, especially as we are having a huge trade deficit with China, the simple truth is that the Chinese also have high trade surplus with nearly every country on earth, including the United States of America (USA), thus, this agreement is not about turning this country into a dumping ground for Chinese goods, rather, it is just to aid the ease of doing business for Nigerian trading entrepreneurs, who have often complained about the unavailability of foreign exchange (US Dollar) to conduct their businesses.
And this two other things:
STILL THE PROMISE OF AMERICA MATTERS
A few weeks back, while analyzing the 2016 International Monetary Fund (IMF) article IV consultation report on Nigeria, I had cause to disagree with its projection on revenue, most particularly, the report projected that the price of crude oil would remain very low in the international market, thus, further putting strain on the Nigerian economy, in terms of collectible revenue receipts for the nation.
Despite the fact of over production, deliberately engineered by mostly members of the Organization of Petroleum Exporting Countries (OPEC), to specifically check oil production by Shale producers and cause oil glut, making it not profitable to produce using the costly American production model, the price of crude oil is still surging higher, rather than obeying the basic laws of economics, where if supply outstrips demand, the price of the product must come down.
But why is that so, it is just the sheer promise of the United States of America market, which is driving the price of crude oil higher, because, less than half the producers using Shale technology are now operating, while America is now being forced to import raw crude for refining, thus, shouldn’t an oil futures trader be crazy for the prospect and promise of a market about to re-emerge.
REWANE’S GOING TO EGYPT SOLUTIONS
Going to Egypt, this statement can be literally understood, it could as well be metaphorically comprehended, as during the Middle Ages, of all the great empires of note, it is the Egyptian empire which is the farthest, having the most challenging travelling barriers to beat before reaching it, yet, it is the most coveted place sought to visit. From the metaphorical angle, when an individual compared your tasks as going to Egypt, he is just telling you how hard it is to actualize it or how difficult it could be to accomplish it or even the pain that is expected for embarking on such a venture.
Literally, it is what Mr. Bismarck Rewane, the Chief Executive Officer of the Financial Derivative Company (FDC) wanted Nigeria to do, to be like Egypt or follow the currency management example of the land of the pharaohs, which due to the constant demand by many a foreign financial risk analysis firm, demanding for the devaluation of the Egyptian Pound, the Egyptian Central Bank (ECB) accented to the request. The idea was that immediately upon the devaluation of the Egyptian Pound, black market trading in the currency would automatically cease, while the positive goodwill from the act, would lead to foreign currency and financial investment inflow into the economy.
Unfortunately, as if it is directed from a book of clairvoyant curse, it seems the reverse is becoming the obvious, as the Egyptian Pound, which was devalued by 13% percentage point to £8.93 Pounds against $1 US Dollar is struggling to keep pace with market prices in the black market, as it is traded at £10.32 Pound to 1 US Dollar. While the Egyptian Foreign Reserve is just barely above $16 billion US Dollars, signifying that perhaps the expected foreign currency remittance, did not materialize despite the devaluation, in fact, the black market trading in the currency, rather than being eliminated, it is the one driving official economic projections, as another round of calls is being made by financial analyst for parity between official and unofficial market rates, to devalue the Egyptian Pound in order to match its value in the black market.
Follow me on twitter: @neeswaid