Swap It, Don’t Break It
Imagine you are China. You sell a lot of
stuff to the world. In fact, your whole economy is based on selling
things to the world. You have an incentive to make trade as smooth as
possible with other countries especially when it comes to making
payments.
Swap It
But you have another dilemma. You are
not a wholly open economy. You like to control your currency as much as
you can to make it undervalued in a way that benefits your
manufacturers. If you let the currency trade freely like the dollar or
Pound, the market will probably value it higher than you want which will
make your products more expensive.
So, the way you can achieve
this is by tightly controlling the amount of your currency that is
available around the world. Unlike the US dollar that is widely
available around the world to the extent that countries like Ecuador can
decide to adopt the dollar as their currency without getting permission
from the US, you can’t do that with the Chinese Yuan.
These 2
issues — trading with the world and tightly controlling the circulation
of your currency — are in tension with each other. So how to solve it?
A Simple Story of Swaps
Or
if you prefer the ‘technical’ name — Bilateral Currency Swap
Agreements. Depending on who initiates the swap, a simplified version
will work something like this.
Nigeria wants to make life easier
for its traders who buy a lot of stuff from China. As Nigeria doesn’t
sell much to China, it is not easy for the CBN to build up Chinese Yuan
reserves. This means that for any trader who wants to buy stuff from
China, they have to get prices in dollars. This adds costs and risks
given that the person in China giving the quote has to convert Yuan to
dollars before sending to Nigeria, bearing in mind the risk of currency
moves affecting his bottom line. The Nigerian guy then has to buy
dollars to make the payment to him. From the point of view of the CBN,
this is extra dollar demand that can be avoided.
So CBN
approaches the People’s Bank of China (PBOC) and asks to set up a swap.
Xe.com tells me that 1 Chinese Yuan is currently worth about N30. So for
the sake of simplicity, let’s say CBN offers to swap N30bn for Y1bn.
Both of them agree an exchange rate on the day of the swap (N30 to Y1)
and they make the transfer.
Now that CBN has some Yuan, it can
then sell it to Nigerian banks in the same way it sells them dollars.
The Nigerian trader can then tell his Chinese trading partner to give
him a quote in Yuan instead of dollars. Once he has the Yuan quote, the
trader can then go to a Nigerian bank and make a request for Yuan in the
same way he used to make requests for dollars. Instead of the headache
of dealing with 3 currencies, the dollar element is now removed and we
have a normal 2-way quote.
This takes off some dollar demand
pressure as people who want to buy stuff from China can face their Yuan
squarely while the dollar people face their dollars. At least we get to
know who is who. All of this is, of course, conditional on the amount of
Yuan being swapped.
But what are the Chinese guys going to do
with their N30bn? Same thing — they can now pay in naira for anything
they buy from their Nigerian trading partners.
Chinese Swaps
For
a number of years now, the Chinese have been entering into these swap
agreements with various countries on a country by country basis. The
swaps typically last for 3 years after which they are renewed and/or
increased. As an example, in 2012, the UK signed a swap agreement for
Y200bn with China. Last year, it was extended and increased to Y350bn.
The map below shows the countries that had swaps with China as at 2015, per the PBOC
China Swaps
China’s bilateral currency swap agreements with other central banks — 2015
And here’s a table with the agreements and amounts swapped.
Swap Table
China’s swap agreements and its counter parties — 2015
As
you can see, Nigeria is coming very late to the party. Perhaps, this
might open the gates in Sub-Saharan Africa. It’s also clear they are
done on a country by country basis depending on the amount of trade that
goes on between them (although the exact correlation is not so easy to
work out).
You’re probably asking — if the agreements are for 3
years, what happens at the end? In theory, both countries simply
exchange currencies at the same exchange rate they used at the beginning
of the swap. Returning to the example above — Nigeria will return the
Y1bn to the PBOC and take back its N30bn from them. If this sounds too
good to be true, it is. The person who initiated the swap will pay
interest on the money it received at an agreed interest rate.
So What Did Nigeria Swap?
Given
the above, inquiring minds probably want to know how much Nigeria
swapped with China and when does the agreement begin? Well, this is
Nigeria and nothing is ever straightforward as it should be.
Buhari Xi
“Nice to meet you, President Eleven Jinping”
First
of all, it appears that the swap Nigeria entered into was with the
Industrial and Commercial Bank of China (ICBC) — the world’s largest
bank by assets. That is, the CBN is not dealing with the PBOC but with a
‘private’ Chinese bank (ICBC is owned by the Chinese government).
Second,
I have trawled the internet and cannot find the amount that was or is
being swapped. As you can see from above, there has to be an amount
swapped for it to make any sense. I have searched Chinese news outlets
and even ICBC’s news page and cannot find anything on the swap let alone
the amount. The news appears to have originated from Nigerian officials
who briefed the media. In contrast, Dangote did get a $2bn expansion
loan from ICBC and this was announced.
When They Come Back Home
So
that’s that about that. Perhaps when they come back home from China, we
will get more details from them. But based on this, we know what
questions to ask (I’m talking to you Nigerian journalists).
Why
was the swap signed with ICBC and not PBOC? How much is being swapped
and for how long? And (bonus question), what is the interest rate to be
paid? (We can assume the CBN initiated the swap and will be the one to
pay interest on the Yuan it receives). How will the Yuan market be
priced? Will it be another ‘official’ and parallel rate mess like we
currently have with the dollar? This is a trick question because, if it
is market priced, we shall have plenty of fun with the contradictions in
pricing the dollar ‘officially’ and the Yuan by the market.
But that’s enough speculation for one post
FF tweets via @DoubleEph
This piece was initially published on Medium.com. Republished here with permission from the author.
source: http://www.africanliberty.org/feyi-fawehinmi-how-to-make-sense-of-nigerias-currency-swap-deal-with-china/
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