Chinese Yuan Can’t Displace US Dollar In Global Trade – Johnson Chukwu

By Kenneth Jukpor

Following the International Monetary Fund’s (IMF) acceptance of the Chinese Yuan into IMF’s foreign reserve basket, MMS Plus reached the Managing Director of Cowry Assets Management, Mr. Johnson Chukwu to provide expert analysis of this development on the two leading global economies; China and the United States of America, explaining the effects on international trade and Nigeria. Johnson Chukwu also gives an appraisal of Nigerian’s economy in 2017 and postulates the future of crypto currency. Excerpts:

Experts say that the acceptance of the Chinese Yuan into IMF’s foreign reserve basket would lead to the Chinese Yuan overtaking the dollar as the leading global currency, how realistic is this and how soon would this happen?

Well, I think there might be some adjustments because if you recall during the tenure of the previous Central Bank of Nigeria (CBN) Governor, Sanusi Lamido Sanusi, he moved part of the country’s foreign reserve to the Chinese Yuan. The fact that the Chinese economy is the second largest economy in the world and it is still growing and China has become a major trading partner for most developing countries, gives rise to these insinuations.

For instance, China is Nigeria’s largest import market and this also applies to all African countries. So, we are going to see a situation where for the exigencies of business, the need to keep their trade in the currencies of their trading partners, a lot of countries might move part of their foreign reserve to the Chinese Yuan. I think that was what informed the then CBN Governor, Sanusi to move part of Nigeria’s foreign reserve to yuan.

However, I do not expect that we are going to see the yuan replace the dollar in the immediate future. This is because the yuan isn’t a highly convertible currency or a free floating currency. To a large extent it is not fully subject to the market forces. There is still a high risk in holding that currency so I don’t think the world reserve would move to the Chinese yuan in the immediate future.

How would this development at the IMF affect international trade in global commodities like crude oil, gold, etc.?

For trading in international commodities like crude oil, gold and other precious metals and other commodities, dollar would still remain the preferred currency. This is because the Chinese yuan is not a free floating currency and you cannot say that it is fully subject to market forces. The US dollar is still more of a free floating currency when compared to the Chinese yuan and the US still remains the largest economy in the world. I believe that in the immediate future people would continue to trade with the US dollar. In the long term, a lot of variables might change. For instance, look at the advent of crypto-currencies; nobody knows how that would eventually end-up or whether it would eventually replace the global currencies.

We may end up with the world migrating to the virtual currency system but in the short term I believe that commodities would continue to be traded in US dollar.

The debt load on the dollar has been highlighted as one of the major challenges that could lead to the fall of the dollar. What is your take on this?

That is true but you should also note that the dollar is presumably the safest currency to hold. A huge percentage of the Chinese government’s reserve is held in dollars. You can see that when there is insecurity people take safety by putting their reserve in dollars. People are also investing in dollar denominated fixed income instruments. So, the fact that there remains a huge flow in dollar instruments would mean that the dollar would continue to dominate despite the debt load. This is because as more people are buying the dollar, they are actually funding the US government debt; as long as people continue to buy into the US dollar as safe instruments, the US debt burden would not lead to any major economic dislocation.

Let’s look at this from the positions of the leading world economies, what can the Chinese government and their investors do to take advantage of this new development and get the Chinese yuan on top and what should the US government and investors do to prevent this major global currency shift?

I don’t think the US government should be worried about the yuan displacing the dollar. It all depends on how these nations’ economies are managed. Beyond the yuan and dollar as international currencies we still have the euro, Japanese yen and the British pound. I think the best we could see is for the US dollar and the Chinese yuan to be the prominent reserve currencies but I think that with what we are seeing in Europe, the euro could also be a strong reserve currency given ability of the European economies to recover from the crisis they had years back.  This trait, coupled with the fact that those economies have started growing as an economic bloc, if they sustain the common currency concept in Europe, I believe that we are going to have the euro as one of the contenders in serving as the global reserve currency.

What does this development mean for the Nigerian economy?

The key thing is that the Chinese currency was accepted as one of the global currencies some weeks back and like I pointed out earlier, China is Nigeria’s number one trading partner. We already have a good relationship with China and the Chinese government has partnered with us in some of the critical infrastructure such as the Abuja- Kaduna standard rail guage, the Lagos- Kano standard rail guage and the Lagos- Calabar rail line, the construction of the highways like the Lagos- Badagry expressway as well as the railway; so there is a huge economic relationship between China and Nigeria.

When the current Nigerian government came in, they said they were going into a policy swap with the China. Although we are yet to see any development in this regard, I don’t think the emergence of the Chinese yuan as a global reserve would materially change the architectural of Nigeria’s trade with China.

Economic history shows that in the last 600 years, there have been six different global reserve currencies controlled by world superpowers. The latest – the US dollar – has dominated world currency for over 80 years. Do you agree with this school of thought that in the next few years another currency would emerge as the leading global currency?

The advantage the dollar has is that the US economy has remained the number one economy for a very long time and for a currency to be a reserve currency, it is based on the strength of the economy. The Chinese yuan is coming into the scene because the Chinese economy has grown to the climax position in the global economy. However, it might be difficult to replace the dollar as the number one reserve currency because of a number of advantages that the US dollar has. I am not saying that in the long run the Chinese economy cannot become bigger than the US. China has to make its currency more market determined but one natural benefit the US enjoys is the fact that English language is the common language for commercial transactions in the world. So, translation challenges would hinder the emergence of the yuan because global commerce is done in English language. If you have to deal with writing commercial transactions in Chinese, you would have to engage a lot of people that can speak and write Chinese, but this challenge is eliminated with English language transactions. This is one of the major advantages the US has over China as people want to avoid the challenges and errors of translation.

I don’t think China’s number one economic priority is to become the main global currency because a large part of the Chinese foreign reserve is still kept in dollars. I don’t not see China taking steps to make their currency the number one. The primary objective of the nation seems to be to grow the economy to create jobs in China. What they have done is to restructure the economy instead of being export driven, it is now local consumption driven. This is a more sustainable economic format when compared to an economy that is export driven. Maybe in future it could become their objective and they would adopt a social structure that would make a lot of countries to speak Chinese, but at the moment the language of commerce is English.

Back in Nigeria, we heard the President, Mohammadu Buhari as well as some financial experts tell us that we have come out of the economic recession. How true or how realistic is this assertion?

 The fact that the nation’s economy grew by 0.55% in Gross Domestic Product (GDP) in the second quarter report means that we have come out of that recession. To come out of recession means that the economy has grown from the level of recession, even if it only grew by 0.01%; as long as there is a positive increase from the position considered as recession, the economy is out of the recession. Technically, Nigeria is out of recession but it is an entirely different matter to ask if the economy is doing well in such a way that leads to an improvement in the welfare and standard of living of the citizens.

The CBN has given a deadline of September 13 to commercial banks for them to comply with its foreign exchange rules and regulations. Is this feasible?

I don’t think the implementation of the CBN’s forex policies would be a problem. It is not rocket science and there should be no complexities in executing them. The banks just need ample time to create the structure but most of the banks already have robust banking application softwares and implementation of the forex guidelines using these applications shouldn’t be a problem. The administrative processes are what the CBN is giving them time to put in place. I don’t see that as a major challenge to any serious bank.

How about CBN’s disbursement of $545million to the commercial banks for forex transactions; is that figure going to be sufficient?

It all depends on the level of economic activities. At a period like this where merchants are stocking for imports for the yuletide season, no amount would be sufficient because they would continue to make demands. However, during lean periods that amount would be sufficient. When you consider that we are moving into the Christmas season, merchants are preparing to do so much buying hence the need to stock forex and any amount put out would be used up.

We are moving into the last quarter of 2017, how would you appraise the nation’s economy and what should we expect in the last quarter?

The nation’s economy this year can be summarized in terms of what we have seen in GDP. We have seen a GDP that recovered from a negative to 0.9% in the first quarter and added 0.5% positive in the second quarter. We saw an inflation that started from 18.7% to about 16.01%. In terms of per capita income, the population is growing at about 2.6% while the economy is growing by 0.5% so we are going to see further deterioration of the standards of living of citizens. This would continue until the economy begins to grow at a rate that is higher than the population growth rate.

Meanwhile, an inflation rate of 16% would lead to further degradation in terms of value given that the economy suffered huge inflation rates in the preceding year. Beyond the price increment of 16% we saw last year, we are seeing an additional increment of 16% year-on-year. This means that an average salary earner, whose income has remained stagnant for the past two years, that salary has been eroded by more than 30% in terms of the real value. This means that the standard of living for the average salary earner would continue to deteriorate. This gives a picture of how the economy has performed in the last one year.

Nigeria Customs Service has continued to announce increase in revenue generated year-on-year despite the drop in importation and port activities; how do you reconcile this? Is it as a result of the drop in the value of the naira vis-à-vis the dollar?

To some extent, the conversion rates of the Customs duty payment would have contributed to the increased revenue. However, another factor could be blocking the loopholes in the Customs system where several goods that escaped duty payments are now subjected to these duties.

You have two factors; one is that they may have improved in their level of efficiency while the other is the fact that the nation’s currency had devalued to some extent and they are using a conversion rate of about N360 to a dollar compared to the previous years.

Despite the drop in volumes of imports, these two factors can increase Customs revenue. However, in the past quarter there would have been some improvement in the volume of activities at the ports compared to what it was in the past. This is because there has been an improvement in forex liquidity and more merchants have been able to access forex to bring in their goods. So, there would have been an increase in the volume of imports in the last quarter or possibly the last two quarters.

What is the future of crypto currency, would you advise Nigerians to invest in it?

The problem is that I am struggling to find the underlying fundamentals of crypto currencies. I hope that it is a sustainable concept. Maybe some of these crypto currencies could displace the virtual currency but for now, I remain uncertain about the future of crypto currencies. I want to see the underlying reserve on which their strengths are based on or what their values are based on.

We have seen several brands created but there questions that arise, such as – what exactly are these crypto currencies standing on? What are the fundamental resources on which these currencies are being created? Maybe we would find a way to understand that in the future. The fact that we are having multiple brands coming up and their values are appreciating or depreciating based on speculations gives one reasons to doubt the sustainability of the crypto currency concept.

 

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