The recent 2% devaluation by China has weakened the relative stability of the Yuan in recent months in the face of stronger US dollar. The People’s Bank of China, said this was done to allow market forces more influence over the value of the currency, as part of the country’s new currency reforms.
While the move should also boost China’s exports, which tumbled by 8.3% YoY in July, in the face of a strong US dollar and falling global commodity prices. Also, the anticipated higher demand for Yuan could enable China attain its goal of having its currency become the fifth global official reserve currency. And given that China has been trying to get the Yuan to be included in the International Monetary Fund basket of Special Drawing Rights (SDR) reserve currencies, the devaluation is seen as a deft move to satisfy IMF entry requirements.
Since China is Africa and Nigeria’s largest bilateral trading partner, the devaluation of the Yuan implies that the demand for some exports that are not price elastic to China may fall. We believe that the latest devaluation may impact negatively on Nigeria’s trade balance as exportation to china becomes relatively more expensive compared to importation.