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 counterparties — 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/

Informative

serbonne

989900 , Malton, Azed, Tuale4u

This is as objective & clear as we can get....

@Doubleeph says it like it is all the time.... he is for nobody & for everybody..

Thanks for the invite, madam mo.

Easy as a dog gnawing bones, Feyi Fawehinmi just put this hotly debated topic to bed like it's a cakewalk. Such an insightful analysis, put so succinctly that even market women could understand.

What a brilliant mind!

So literally, the UK is early to the party but doesn't want us at the party at all, couldn't even tolerate our lateness.

It seems to me like the "what's good for the goose is good for the gander" saying does not appeal to them now, only this time, the gander taketh it by force. So basically, they are angry that we are reaching heights they could never have imagined.

If being a dullard implies making such giant strides and attaining so much, then I'd much rather be a dullard myself. Na ehn pay pass .

Where's Mr president when one needs him, does being a dullard requires being smart? Cos Oga, you are so sharp!

All I see is win win win...

Oga mynd44, uncle lalasticlala, this should benefit everyone I bet.

Op: your analysis was ok. You did well.

So even the UK have renewed and increased the volume of cash swap that they do with China??!!

Very interesting. Anyway, let's hear the details of naija own first.

theV0ice:
So even the UK have renewed and increased the volume of cash swap that they do with China??!!

Very interesting. Anyway, let's here the details of naija own first.

Yes nah, oyinbo nor want us to carry shoulder up, hence the negative propaganda..

I read about UK being a currency ally sometime ago but didn't think much of it till now, but it's obvious how they think.

All the gbo gbo e gbo gbo e sold at Asda, Next, Debenhams etc, when we have manufacturers who are able to produce here, na gbege for their economy...

They paint China black but Disney just opened a "world" in China, who dem dey fool!!

Cc malton

nice analysis

modath:


Yes nah, oyinbo nor want us to carry shoulder up, hence the negative propaganda..

I read about UK being a currency ally sometime ago but didn't think much of it till now, but it's obvious how they think.

All the gbo gbo e gbo gbo e sold at Asda, Next, Debenhams etc, when we have manufacturers who are able to produce here, na gbege for their economy...

They paint China black but Disney just opened a "world" in China, who dem dey fool!!

Cc malton

U dey mind them. Chinese and Taiwan products are bad, yet Foxconn technology Ltd makes electronic components for big American and European companies e.g Apple.

Na the mumu Nigerians wey no fit make ordinary toothpick yet can yab China.....na dem deserve pity.

If you're smart and want quality, China will give it to you.

If you're stupid, crooked and want quantity, dem no go deny you. They sell to angels and devils. As long as the money comes.

Nigeria will be great again.
The pathfinder for Africa continent.

modath:


Yes nah, oyinbo nor want us to carry shoulder up, hence the negative propaganda..

I read about UK being a currency ally sometime ago but didn't think much of it till now, but it's obvious how they think.

All the gbo gbo e gbo gbo e sold at Asda, Next, Debenhams etc, when we have manufacturers who are able to produce here, na gbege for their economy...

They paint China black but Disney just opened a "world" in China, who dem dey fool!!

Cc malton

Don't mind the detractors.

They just won't stand the sight of anyone threatening their hegemony.

Instead of working harder to earn the stay atop, they rather others don't grow at all, just so they can keep a firm grip.

modath:


Yes nah, oyinbo nor want us to carry shoulder up, hence the negative propaganda..

I read about UK being a currency ally sometime ago but didn't think much of it till now, but it's obvious how they think.

All the gbo gbo e gbo gbo e sold at Asda, Next, Debenhams etc, when we have manufacturers who are able to produce here, na gbege for their economy...

They paint China black but Disney just opened a "world" in China, who dem dey fool!!

Cc malton

The hypocrisy of the West is just amazing. It's okay for them to swap currency with China but heinous for any African country to follow suit!

Good analysis.

theV0ice:


U dey mind them. Chinese and Taiwan products are bad, yet Foxconn technology Ltd makes electronic components for big American and European companies e.g Apple.

Na the mumu Nigerians wey no fit make ordinary toothpick yet can yab China.....na dem deserve pity.

If you're smart and want quality, China will give it to you.

If you're stupid, crooked and want quantity, dem no go deny you. They sell to angels and devils. As long as the money comes.

The USA'S contigent to the 2012 London Olympics' team uniform na "meid in shaina" .. ..


http://www.forbes.com/forbes/welcome/#5a18341d46a7

http://m.huffpost.com/us/entry/olympic-uniforms-us-china_n_1667780.html

http://www.bloomberg.com/news/articles/2012-07-16/made-in-china-olympic-uniforms-are-a-win-for-the-u-dot-s

Hmmmm

Hmmm.....

"Instead of the headache of dealing with 3 currencies, the dollar element is now removed and we have a normal 2"
#PMB Nagode 4 ds 1..... chilled fura 4 u as u no dey drink ogogoro like our ex oga..

Yes o, swap it, don't break it,,


it took Jonathan 4years to **** it,,

The writer left some questions unanswered...eg. Why was the swap not signed with the people's bank of China, like other countries did?

modath:

989900 , Malton, Azed, Tuale4u

This is as objective & clear as we can get....

@Doubleeph says it like it is all the time.... he is for nobody & for everybody..

You mentioned my moniker, meanwhile, wailers food don done ooo

Even UK is doing Swap deal with China. No wonder IMF is afraid china want to make them irrelevant.

The more we have chinese investment in Nigeria, d more d amount that can be swap. Since chinese company will need naira to pay nigerian workers and other local cost in thier business.

The truth is dat the swap deal favour d section of Nigeria who import from China alot.

Yet that same section of Nigeria are blindly making negative noise about d swap deal just out of bad belle politics.

kennydee05:
Nigeria will be great again.
The pathfinder for Africa continent.

Nigeria was never great.

Story story...
PDP are giving reasons why we don't need the swap while APC are giving reasons why the swap is the best idea.

For me, i would wait to see the outcome of the swap before i place my judgement.
Bye

This deal is being handled like the occult.

aha!

do u mean that we don't have sense again in Nigerian ni

Nothing disgusts me more than the sudden negative press from the west coz Nigeria is trying to take her future in her hands.. They tell you africans and her leaders, despite having a great deal of resources in their possesion, lack insight, hardwork and determination to develop their countries but You will be surprised at the amount of work being put in by this same accusers to keep the african continent backward and underdeveloped..!!

Pathetic Neocolonialists!!