Napoleon of France is believed to have said about China, “there lies a sleeping giant. Let him sleep! For when he wakes, he will shake the world.” China has not been sleeping. It is today a world leader and this piece places the China-Nigeria Bilateral Swap Agreement (BSA) in the context of internationalisation of the Chinese currency, the renminbi (RMB), articulates the import of a typical BSA and concludes with what Nigeria should watch out for.
When a currency is internationalised, it is fully and freely convertible, it must be traded actively in foreign exchange markets, financial instruments must support the currency, it must be held as reserve by several countries and it must be used as a peg against other currencies. The most internationalised currencies of the world today are the US$, the Euro, the British pound (GBP) and the Japanese Yen – in that order. China is making steady advances to internationalise the RMB to join the aforementioned currencies and BSAs are just part of the tools with which it seeks to achieve its ambition.
The best way to understand a BSA is to describe how it works and what tangible benefits can be derived by governments, corporate organisations and individual investors. The mechanics of the China-Nigeria BSA is such that Nigeria undertakes to sell a specified amount of naira to People’s Bank of China (PBoC, the central bank in China) in exchange for RMB at a pre-determined exchange rate. Nigeria expressly agrees to buy back the naira at the same rate on a specified future date, usually after three (3) years. The CBN at its own discretion subsequent to signing the BSA, has to activate the agreement and buy RMB, which it could then on-lend to domestic Nigeria banks, for instance. Upon expiration of the 3-year BSA period, CBN pays interest (at prevailing market rate) to PBoC only for the RMB used. Due to the multi trillion dollar hard currency reserves held by China, BSAs also allow counterpart countries that tap the RMB under the agreement to flexibly convert the currency to USD.
PBoC could similarly access naira from the CBN to on-lend to Chinese commercial banks to provide for instance, trade finance for payment of imports from Nigeria. It is important to note that unlike in 2011 when the CBN was reported to have converted US$43 billion of reserves into RMB, RMB currency used under the BSA is expected to be new money.
Unless the BSA is renewed upon expiration, Nigeria returns RMB to China while China returns naira to Nigeria. Though content of the BSA has not been made public, the above described mechanics are fairly standard but it is not impossible that Nigeria may have negotiated a different set of terms and conditions. E.g. due to China’s appetite for oil, gas & mining resources, borrowings under the BSA may be repayable using natural assets.
The arrival of RMB onto the Nigeria financial markets would imply that from here in Nigeria, individuals, corporate entities (especially domestic banks) and governments can lend, borrow, maintain balances and invest using the RMB as unit of account, similar to what obtains today for the USD.
China’s US$5.7 trillion bond market is now open to international investments from central banks, sovereign wealth funds and other financial institutions. HSBC, McDonald’s, Unilever, Tesco, RBS, Volkswagen, Standard Chartered Bank and the IFC are all known to have issued offshore RMB denominated bonds referred to as “dim sum” bonds which are commercial and government bonds. Foreign issuers including governments are also now permitted to issue RMB denominated bonds onshore China – what Minister Kemi Adeosun, rightly refers to as “panda” bonds.
China has at least 30 BSAs worth an estimated US$500 billion equivalent. However, what is curious is that only less than 10% of that amount may have been accessed by counterpart countries since the first one in 2009. It is possible that many of these countries view the arrangement as a standby credit line for use only in times of emergencies such as the financial crises of 2008.
If an offshore centre is set up in Nigeria like in Hong Kong or London, to support RMB liquidity for the sub region, it implies that the PBoC would designate a branch or subsidiary of a Chinese commercial bank to formally establish physical presence in the country. That branch or subsidiary will act like a China correspondent bank thus strengthening usage of RMB for international payments, trade, investments and reserve currency holdings.
The China-Nigeria BSA is a tool for fostering trade and investment as well as for international financial cooperation and liquidity management. Notwithstanding, we need to ask ourselves some questions. Does having China, a state-led economy as a BSA counterpart (and implied “dumping” of the USD), affect our diplomatic and economic relations with the rest of the world in particular the US and Japan, which it seems, continue to holdout against internationalisation of the RMB? China has led the establishment of the New Development Bank (NDB) and the Asia Infrastructure Investment Bank (AIIB) – have we situated our larger interest and optimally extracted the most benefits as a result of these regional shifts? Has Nigeria reliably sourced information required to assess market (governance) risks and opportunities relating to the BSA and those relating to the operationalisation of its collateral market initiatives? Are our market regulators ready? Do we have in Nigeria an adequate and expanding pool of China experts, who understand business Chinese to do the diplomatic, technical and legal work necessary before we sign the dotted lines?
The degree of confidence with which our policy leaders are able to respond to the foregoing questions is directly linked to the certainty of the financial and non-financial outcomes we anticipate from our China voyage. As we open ourselves more and more to China and the rest of the world, we need to make sure we put our national interest first. Nigeria first!
Mayowa Amoo
