Nigeria-China Currency Swap

Nigeria and China signed a three-year extendable bilateral currency swap agreement speculated to be worth RMB 15 billion vs NGN 720 billion (circa USD 2.5 billion). Well, the deal is actually between the Industrial and Commercial Bank of China Ltd (ICBC) and Central Bank of Nigeria (CBN) on Yuan transactions.

As a currency swap deal, at the end of the term, the the OTC-type agreement can be extended and/or varied by both parties. Otherwise both countries can just exchange their currencies back, at swap fx rate that reflects swap interest rate per the agreement.

The Renminbi agreement signed on 27 April 2018 is designed to facilitate international trade relations between both countries so that Nigerian traders who import goods from China can pay in Yuan rather than US Dollars. And Chinese traders/investors in Nigeria can equally transact in Naira.

China’s currency has two major names -official and unofficial. The unofficial name also has other variants generally used for social banter and other informal purposes.

1. Renminbi (RMB) is the official name of the Chinese currency and it means "the people's currency". It was introduced at the founding of the Communist People's Republic of China in 1949. This is the name equivalence of Nigeria’s official currency – the Naira (NGN) which was introduced on 1 January 1973, to replace the British Pound Stirling at the rate of 1 Naira to 10/- (10 shillings, also written 10s); which in turn was equivalent to half of 1 Pound. So, 2 Naira was equivalent to 1 Pound Sterling (NGN1 = GBP2) on 01 January 1973. As at June 2018, it is circa NGN 495 - 500 to GBP1, a clear reflection of Nigeria's misfortunes and mismanagement by successive governments.
2. Yuan (CNY) is the name of a unit of the renminbi currency. Yuan means Dollar silver currency and goes back over 400 years. The Nigerian equivalence in terms of currency unit is Kobo. 100 Kobos is equivalent to 1 Naira.
   

It is important to know the difference between Yuan and Renminbi, and when to use them.

Trying to explain the transactional usage of the Chinese currency regarding the difference between Renminbi and Yuan compared to Naira (sign: ₦) and Kobo, is a bit tricky. For instance in Nigeria, for 1.50 you can say 1 Naira fifty Kobo. In the UK its 1 Pound fifty Pence. And in the USA they its 1 Dollar fifty Cents. For China, it seems both RMB and CNY can be used interchangeably but the most widespread international usage is Yuan.

Locally, the symbol for CNY is ¥ and its commonly represented by the Chinese character "元", pronounced "Yuan". Locals often call the Yuan "kuai", also often called kwai. Other names are "mao" or "jiao" which refers to a tenth of CNY.

My Chinese friends have explained the difference to me but I still consider it somewhat confusing especially the informal names. Apparently, Renminbi is mostly used for official purposes including books and other written forms. On the other hand, Yuan is used more informally in social settings when chatting. Similarly, Kuai is mostly used by locals for informal banter. So, for written transactions you can have RMB1.5. For normal social banter its Yuan or Kuai, as in, 1 Yuan 5 Jiao' or '1 Kuai 5 Mao'.

A huge proportion of Nigeria’s imports are from China and the ratio to total importation is projected to grow steadily. This currency swap will reduce the downward pressure on Nigeria’s FX reserves. The immediate impact is appreciation of the value of the Naira particularly against the USD due to the sharp fall in its demand to pay for Chinese imports. Albeit in the short term. Longer terms implications may well have unexpected consequences. For both Chinese and Nigerian businesses, there’ll be less exposure of third party currency risks.

For Nigerian traders, there should immediately be a shorter transaction lifecycle if the authorities at the CBN can put an end to the bureaucratic and bribery inducing practices. The transactional costs should also be cheaper for businesses.

Nigerians that travel to China should have their wits about them to avoid a rip-off particularly as regards fake Chinese currencynotes and coins. Safer to withdraw cash from ATM’s inside banks and get enough change from the bank for petty transactions. Avoid using large denomination for petty cash transactions like transport fares and snacks, use card payments and bank transfers where possible but always confirm the bank details are correct before effecting payment. For avoidance of doubts, get a guide/translator and ensure transactions are in English and receipted. As there are now significantly more Chinese living in Nigeria, this advice is also applicable to them as well as other foreigners living in or travelling to Nigeria. Both parties will be well advised to imbibe local cultures and learn the major languages at the very least.

The key points of concern are that this deal is only good on face value for short-term liquidity management. In the long term, it could ultimately hamper growth of local Nigerian firms. We’ll be watching and participating with keen interest.

Nigerian manufacturers who use a lot of Chinese input will benefit immensely but we hope they won’t go on holiday on this deal. It is only a short-term measure. Invest wisely!