The CBN recently announced it was now going to diversify between 5 and 10 percent of our reserves into Yuan, the Chinese currency.
This move was mostly welcomed in financial circles as it is believed Chinese imports account for 15% of the country’s imports. Several editorials including the Businessday Editorial of today reasoned that because “global stock markets were roiled last month after Standard & Poors stripped the United States if it’s AAA debt rating, fueling some investor fears that the dollar may be debased in the long run owing to America’s yawning deficit”. They are basically saying this is part of the reason why we should diversify our currency reserves.
I particularly see this move as a politically motivated one rather than one premised on some financial fundamentals. First of all the US does not face a debt crisis. It’s problems is not its inability to service debts but it’s urgent need to cut down on it’s long term deficits. As such the currency risk is only as a result of the imminent double dip recession ironically precipitated by it’s spending cuts in a bid to cut deficits.
The question one should ask the CBN really is what is the net export position of Nigeria with China. If it significantly imports more from China than it exports then the purpose may well be defeated as it will still face significant currency risk as it strives to meet up the currency gap.
The government should also realize that the jury is still out on the yuan as it is widely believed that the currency is being manipulated by the Chinese government to ensure it’s exports proceeds are not devalued. How then can we be so comfortable to hold reserves in currencies that do not conform to the tenets of free markets.
The dollar may still be dusting itself off taking the debris caused by the global economic crisis but it still remains the most fungible currency around. The Chinese are yet to show transparency in their economic dealings and as such countries dealing with them are bound to be at the receiving end of any risk.
The CBN should thread cautiously as there are several other factors aside from political that should determine why we should see it as a long term solution to a reserve currency.
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If China is deliberately devaluing the Yen to make their exports competitive, then it's only a matter of time before they are forced to allow it to appreciate. So I think it's a good dollar hedge.