An urgent proposal

Nigeria: Imagine you get an email from someone claiming to be a Nigerian central banker. Yes, just imagine. Your correspondent has heard you are of sound character and good judgment, and is in search of a safe haven to store $3 billion in oil riches. In return you are offered untold goodies — numerous investment opportunities and access to a huge potential market of middle-class consumers. China is the lucky recipient of just such a communication. Nigeria’s central bank would transfer a tenth of its $33 billion foreign exchange holding into yuan assets, it said on September 6.

That fits with China’s ambition to turn its money into globally accepted tender that matches its status as the world’s second-biggest economy. It also deals another blow to the US dollar’s status as the world’s reserve currency. Nigeria isn’t the first to dip a toe into China’s yuan pool. The Philippines and Hong Kong, too, have discussed expanding yuan reserves, presumably to chase political favour and capture long-term currency appreciation. Investible assets aren’t easy to find, since China has barely any external debt.

But, central banks can invest in China’s interbank market, as Malaysia did in 2010, on a case by case basis. Despite Nigeria’s bold move, China’s currency still has few of the qualities of a credible reserve currency. Low inflation is usually a prerequisite, yet China’s runs at above six per cent. Stable monetary policy is another typical condition, yet China lacks an independent central bank. Most important, China’s capital controls make it hard to see how a holder of yuan reserve assets can liquidate these in a crisis.

Nigeria probably has other priorities, such as continued Chinese investment. The Middle Kingdom has been a keen partner for the oil-rich nation. Among other things, it has signed a $23 billion agreement to build three oil refineries — though little of that has yet been spent. Nigeria’s foreign investment fell to a five-year low in 2010, helped by a hostile business climate, endemic corruption and uncertainty around mired oil sector reforms.

Nigeria’s yuan purchase looks more like a gesture of goodwill than a shrewd economic decision. It would be a mistake to read too much into the move. But, growing support for yuan reserves does represent another cut of confidence in the dollar. For the dollar to lose its status, it may need a thousand more such cuts. A trend, however, is emerging.