Could Nigeria Become Africa’s Offshore RMB Hub?

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On October 1, the Chinese renminbi officially joins becomes the fifth international reserve currency. Over time, Nigeria stands to benefit from RMB’s rising international role.

On October 1, 2016, the Chinese renminbi (RMB) will officially join the International Monetary Fund’s (IMF) international reserve assets; that is, the SDR (Special Drawing Rights) basket. From the perspective of the IMF, this is recognition of China’s success in opening up its markets.

The future of the Chinese RMB is far from irrelevant to Nigeria. Last spring, after a successful visit in Beijing, President Buhari said that Nigeria had received a $6 billion Chinese loan to fund infrastructure projects.

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In the short-term, Nigerian authorities hope to rely on China’s support to finance the 2016 deficit. But should they have even longer-term strategic RMB objectives?

 

Three waves of capital inflows

After October 1, RMB asset are likely to benefit from three consequent waves of capital inflows. The first wave involved the very inclusion of the RMB among the IMF international reserve assets. That caused a re-weighting of the SDR basket, which is currently valued at $285 billion.

Today, the SDR assets remain dominated by the weights of the US dollar (41.7%), the euro (30.9%) and Chinese renminbi (10.9%), followed by the UK pound (8.1%) and Japanese yen (9 percent). The weight of the RMB translates to about $31billion into the RMB assets starting in October, probably gradually over half a decade.

As long as China’s economic growth prevails, even as it decelerates, and financial reforms continue, the RMB inclusion is likely to prompt another wave of capital inflows by central banks, reserve managers and sovereign wealth funds. Today, the allocated part of the global foreign exchange reserves – the Currency Composition of Official Foreign Exchange Reserves, or COFER – amounts to $7.2 trillion. The US dollar still accounts for nearly two-thirds of the total, against a fifth by the euro, while the pound and the yen are less than 5% each.

Now, assuming that China’s current share of global reserves is about 1 percent, the IMF’s decision could cause a significant capital inflow (5%) – about the weight of the yen or pound – into the RMB assets, which would translate to some $360 billion by 2020. If, on the other hand, the RMB’s COFER share would reflect its SDR weight, the inflow of capital could more than double to over $780 billion.

A third capital inflow is likely to ensue as private institutional and individual investors follow in the footprints of the IMF and public investors. If these allocations rise to just 1 percent, they could unleash about $200 billion into the RMB assets by 2020. But again, if these allocations would reflect the renminbi’s SDR weight, capital inflows could double, triple or increase by a magnitude.

 

Shifts among offshore RMB leaders

Nothing reflects the behind-the-façade positioning for the renminbi as the dramatic expansion of offshore RMB clearing hubs – that is, international financial hubs that can build liquidity and promote the use of the Chinese currency outside of China.

Today, there are more than 20 offshore RMB clearing hubs appointed by the People’s Bank of China (PBOC). These hubs are typically characterized by strong trading and investment ties with China. They are also strategically located in the key world regions covering all time zones.

In the early days of the RMB internationalization, Hong Kong had a near-monopoly of all renminbi payments internationally. For all practical purposes, this dominant position endured as long as the mainland was mainly a destination of foreign capital.

Today, as Chinese multinational companies and investors are internationalizing rapidly and Chinese capital is moving across the borders, Hong Kong’s role as the leading RMB offshore center remains dominant in absolute terms but is declining in relative terms. It still has more than two thirds of offshore RMB traffic (70%).

Until recently, Singapore was the strong second RMB offshore center in the world, but not anymore. After a year of London’s purposeful efforts to have a much closer relationship with China, the UK (6.5%) has replaced Singapore (4.5%) as the second largest RMB offshore center worldwide.

While Singapore fell third among the RMB offshore centers, the tiny city-state remains a key hub, thanks to its location as a geographic hub for foreign multinationals and their treasury centers, as well as regional commodity trade.

 

RMB offshore marketThriving early RMB offshore hubs

Until recently, the US had no role among the RMB offshore centers but unofficially that is changing as well. Today, the US (3.1%) ranks fourth after Singapore, barely ahead Taiwan (2.5%) and South Korea (2.1%).

Nevertheless, like London’s City, Wall Street is likely to embrace the RMB over time. As London understood quite well a year ago, early entrants in the offshore RMB business stand to benefit from the Chinese currency’s internationalization.

During President Buhari’s visit to China, the RMB accounted for 7 percent of Nigeria’s $27 billion foreign exchange reserves, as opposed to the mighty US dollar (77%). However, the Buhari-Xi agreement on the flow of the RMB in Nigerian banks hoped to make the Chinese currency a part of Nigeria’s foreign exchange reserves, thus supporting China’s goal of RMB internationalization.

As long as it can deter separatist inclinations, Nigeria will continue to overtake South Africa’s role as the largest potential BRIC economy in the continent. Nevertheless, there are no Sub-Saharan offshore RMB centers, at least as of yet.

The question is, could and should Nigeria seek to become the first one?

This post first appeared on BusinessDay Nigeria, Oct 3, 2016

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Dr Steinbock is an internationally recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies and large emerging economies; as well as multipolar trends in stocks, currencies, commodities, etc. Altogether, he analyzes some 40 major world economies and a dozen strategic nations, across all world regions.His commentaries are released regularly by major media in all world regions (see www.differencegroup.net). Dr Steinbock is CEO and founder of DifferenceGroup (for more, see www.differencegroup.net). In addition to advisory activities, he is affiliated as Research Director of International Business at India China and America Institute, and as Visiting Fellow in Shanghai Institutes for International Studies SIIS (China) and EU Center (Singapore). As a Senior Fulbright scholar, he is affiliated with Stern/NYU, Columbia Graduate School of Business and has cooperated with Harvard Business School. He has advised/consulted for the OECD, the European Commission, the Nordic Council and European government agencies, multinationals and SMEs, financial institutions, competitiveness and innovation organizations, and so on.