Nigerian Central Bank Governor Lamido Sanusi said in Beijing today that Africa's top oil exporter will convert as much as 10 percent of its $33 billion in foreign reserves from US dollars into Chinese yuan. Central banks use foreign reserves to manage their own currency's value.
In Nigeria's case, the up to $3.3 billion it may convert to yuan isn't an enormous sum – not, at least, for the oil-rich exporter. What is enormous, economists say, is what the bank's decision says: The yuan, pegged to the dollar until not long ago and managed more recently to keep Chinese exports cheap -- is turning into a global reserve currency. Africa – particularly West Africa – may be China's earliest, easiest zone of success.
The rise of China's yuan as a global currency – trusted by central banks, accepted by finance ministries, routinely used to purchase raw goods – is “inevitable,” Sanusi said, putting his mouth where his money is.
Coming from Africa's most dollar-denominated economy – dominated by Western oil companies – his vote of confidence is “a significant win” for the yuan, said Razia Kahn, economist at Standard Chartered-Bank.
“I don't think the symbolism should be lost on anyone," she says. “The fact that you have a major African oil producer saying we're going to diversify our reserves has a significance that can't be ignored. It's a goodwill gesture in the hope that it will lead to more Chinese investment in Nigeria."
The bank, Sanusi adds, is likely to orchestrate a currency swap with China, which would allow the Asian power to conduct more of its Nigeria dealings in its own currency, also called the renminbi.
“That opens up a whole new dimension,” Ms. Khan says.
Since the end of the second World War, most international commodities – from barrels of Bahraini oil to casks of Chilean chardonnay – have been priced and sold in dollars, an advantage to US buyers, and the principal reason why dollar-conversions account for 85 percent of foreign exchange transactions in the world.
Gingerly, the world's most populous country is attempting to push its currency as a rival for commodity purchases. It will find no greater luck than in Africa, a continent flush with minerals, where China enjoys close ties, says Standard Bank researchers Simon Freemantle and Jeremy Stevens.
“We, rather conservatively, anticipate that around 40 percent of [Chinese]-African trade would be settled in renminbi by 2015,” Mr. Freemantle wrote in an e-mailed statement. That 40 percent would represent $100 billion worth of trade, more than China's entire trade with Africa last year.
If successful in Nigeria, they are likely to turn to other financial centers on the continent: South Africa, then Ghana, Angola, and Kenya.
But, in a sense, Khan says, China has already displaced the dollar in Africa's more blighted corners: Guinea, Democratic Republic of Congo, and Sudan. In each, China, is constructing mammoth infrastructure projects -- roads, railways, ports, stadiums -- in return for commodities like cobalt and bauxite.
“At the end of the day,” Khan says. “isn't all that infrastructure just a proxy for China's currency?”