China Has Covert Intention To Perpetually Subordinate African EconomiesLast December, the CBN issued a circular, with Reference No: TED/FEM/FPC/GEN/01/03, which indicated its determination to diversify the country's foreign reserves.It identified 13 currencies into which it wanted to diversify our foreign reserves. Apart from the US dollar, which has historically been the country's, as well as others' reserve currency, the top contenders for this diversification are the Euro, British Pound Sterling and the Japanese Yen.To make good his interest, the CBN governor, Mallam Sanusi Lamido Sanusi, announced last week that the bank is diversifying between five and 10 per cent of the country's estimated $32 billion into the Chinese Yaun. The affirmative rationale for this decision, as advanced by the governor, and analysts within his school of thought, is rooted in the following economics argument:(1) China accounts for over 15 per cent of Nigeria's annual imports, which translate to about $38 billion yearly, or $1.61 billion (if 5 per cent) and $3.2 billion (if 10 per cent), respectively of the current foreign exchange $32.3 billion reserves.(2) The dollar has been experiencing crisis of confidence due to America's debt crisis in recent times, and this seeming uncertainty heightened Sanusi's sense of urgency (and not Nigeria's collective) to diversify the nation's foreign reserves away from the dollar. Sanusi added that, presently, 79 per cent of Nigeria's reserves are invested in dollars.(3) Because a weaker dollar hurts China, which has about two-thirds or $2.1 trillion of its $3.2 trillion foreign reserves in the US dollar.Sanusi's conjecture or anxiety is that a weaker dollar, consequent upon the intractable US debt, might force many countries to diversify away their foreign reserves from the dollar to other currencies.While the grounds canvassed for this diversification appear reasonable and cogent, however, they are not sufficient conditions for taking such a risk. The aphorism that the devil one knows is better than the angel one doesn't know is immediately instructive. In my judgment, we don't have to behave like the proverbial fools that rush where angels fear to tread.Had Sanusi embarked on this diversification frenzy in December when he issued the circular referred to above by holding reserves in the Euro for example, we would have been caught in the quagmire and uncertainty of the Euro zone now.One is tempted to ask: Why hasn't China deemed it expedient or urgent to diversify its over $2.3 trillion' Why hasn't China, with its huge foreign reserves held in US dollars, expressed the kind of anxiety we are showing about the state of the US dollar' In fact, China is increasing its foreign reserve holding in US dollars.Despite China's giant economic leaps, it still remains a developing country for a variety of economic and non-economic reasons. America's stability and capacity to withstand economic shocks cannot, by any stretch of the imagination, be compared to China's.Any discerning observer cannot escape the conclusion that Sanusi's CBN policy thrust and decisions have been mired in controversy, simply because of the indecent haste with which these policies are articulated, announced and implemented.As the investing public and markets are trying to grapple with the consequences of one hasty policy announcement, Sanusi comes up with another.Piecemeal evolution of macroeconomic policies cannot augur well for any economy and certainly cannot be the best way to develop or achieve the goal of Vision 2020.To be sure, the speculation in the global foreign exchange markets about diversification of country reserves from the US dollar did not start today. In fact, any time the dollar suffered significant depreciation, of which there had been just a few over the past three decades, such rumours had been frequent catalysts of abrupt exchange rate movements.With the advent of the Euro and the subsequent greater liquidity of euro-area financial instruments, as a credible rival to the US dollar, as well as with the nascent development of a domestic-currency Asian bond fund as an alternative to traditional instruments in which to invest Asian countries' foreign exchange reserves, concerns about reserve diversification have intensified.But it is instructive that most of the Asian countries have not qualified the Yuan strong enough to be an international reserve currency. They still base much of their holdings in US dollars.Discerning observers have also noticed that such rumours have gained momentum since the early part of this decade. This period has witnessed a rising wave of anti-American sentiments and rhetoric and these have tended to dominate global public debate.There have also emerged in many developing countries leaders, who not only have phobia for the US and its interests and representations, but also would want, if possible, move the United Nations Office and other international offices away from the US.What these leaders cannot achieve politically, they use their national economic policies.So, the slightest eruption of American economic and sociopolitical challenges becomes a convenient trigger for skewed international reactions of immense proportion that few economies in this world can withstand. Yet, for their hatred of the US geopolitics, most of these countries, including Libya, Iran, Iraq, Cuba, North Korea and most Asian countries, including China, denominate large portfolios of their foreign exchange reserves in US dollars.Certainly, China cannot withstand the kind of pressures put on the US economy on account of its international profile. Were China to witness these disequilibrating events, it would have capitulated.Indeed, no other economy in the world can withstand the kind of pressures brought on the US economy both from internal and external forces.We can recall that, in 2005, Korea planned to diversify the currency composition of its $200 billion foreign exchange reserves. The next day, the Korean currency, the Won, appreciated slightly against the dollar against the backdrop of official statements by various Korean authorities.Other countries, such as Taiwan and Singapore, also issued statements denying that they had been diversifying, or planned to diversify, their foreign exchange holdings. Because the Korean and other authorities made noise about the diversification of their dollar assets away from the US into euro- and yen-denominated assets, the international community and markets became more interested in the movement of the dollar against the euro and yen than they were about the parity movement between the Korean Won and the US dollar.Such has been the case with wide speculations about the US dollar that the International Financial Institutions have had to caution policymakers that, while acting in their own national interests, they should be more circumspect to avoid overheating the foreign exchange markets.Certainly, national pronouncements about large-scale international foreign exchange reserve diversifications are bound to introduce into or exacerbate the volatility of foreign exchange and financial markets.While nobody will quibble about CBN's commitment to gradual adjustment of the actual currency composition of the nation's reserves to any new benchmark, one doubts if the Yuan has attained or acquired that benchmark status.There are more strategic reasons for holding foreign reserves in designated currencies than trade and trade settlement at the market dictate. The enormous size of China's reserve holding in US dollars confers great economic (and sometimes political) power on China. The CBN should not vicariously make Nigeria unduly susceptible to China's power.Already, the growing trade imbalance between Nigeria and China is a source of concern without having to subordinate the Naira to the Yuan.The CBN should instead encourage Nigerian businesses to gain strong foothold in the Chinese market. Why should we denominate our reserves in Yuan simply to engender inter-bank transactions and to foster collaborations and alliances with Chinese financial institutions and businesses'The CBN should have asked itself this question: How much of interbank collaborations and alliances have we witnessed since keeping our foreign reserves in the US dollars' Nigerian Government and its officials easily forget that China is a developing country, supported by its government, with an unwritten or covert intention to perpetually subordinate African economies to the vagaries of its own markets, products and economic policies. Why should we hold our foreign reserves simply to support huge importation of fake and inferior products from China'Perhaps, the next move will be for Chinese Government and its officials to cajole their Nigerian counterparts to devalue the Naira in favour of the Yuan so as to make their imports cheap for the Nigerian market.Because of opportunism with guile, Nigerian officials tend to make decisions they know are not altruistic. If we must be blunt, China cannot enable Nigeria to develop. If we want to build strategic industries, we defer to China or some other non-English developing country simply because the latter can and will protect the opportunistic disposition of Nigerian officials with whom they negotiate. This is the kind of illegal protective cover, which Western multinationals or their companies cannot offer their Nigerian counterpart. If they do, it is only a matter of time Wikileaks will get to know about it because Western foreign companies and their executives, unlike Nigerians, Halliburton's cases are a pointer to the fact Nigerians cannot contrive the kind of hanky-panky deals they do with the Chinese with Western multinationals.Ironically, Nigerian leaders can't ask or imagine why China engages mature Western multinational firms for the development of their own critical infrastructure, like their fast railways or their electricity, which was built by the US General Electric. China's financial system can, in no way, be compared with the efficiency level of the US system. If China's financial system is benchmarked against the US, why should we benchmark ours against China'It has an inhospitable property rights tradition that is both provocative and exclusive.The literatures that explain China's economic and political systems are in Chinese. So, both from academic research and communications perspectives, there is a linguistic lacuna that obfuscates allocative efficiency and property rights.It is elementary that communication barriers create transactional disabilities. These frictions cannot be cured by Sanusi's affirmative arguments. It is trite that analysis influences the way the world is perceived, including the power to delude and misguide as well as to illuminate and instruct.I emphasise that the assumptions of Sanusi's frictionlessness in dealing with China's autarchic financial system are severely at odds with the reality. Instead, it ought to be apparent, even to the casual observer, that Nigerians' contractual participation in China's financial system must be limited in bounded rationality respects.It is not for Sanusi or the CBN to make the case for China's Yuan. He is making the same mistake by using similar offensive approach to Islamic Banking to canvass Nigeria's patronage of the Chinese Yuan.Let me explain. As a banking product, the evolution and configuration of Islamic Banking or any variant of non-interest banking should not ordinarily attract public opprobrium had the CBN restricted itself to simply licensing whoever wants to establish any kind of bank, provided such organisation meets the criteria it (the CBN) has set.The CBN can borrow a regulatory leaf from the National Universities Commission (NUC) in the way it handles sensitive national issues.The NUC is the regulatory counterpart of the CBN for the orderly development of the Nigerian University system. The NUC does not hold workshops or seminars nor does its Chief Executive engage in any type of publicity that might be misconstrued by the public or a section thereof. The NUC simply sets the guidelines for the licensing of a university and anybody who meets these criteria is on.The Executive Secretary of the NUC has no business discussing or using its limited resources to hold workshops or conferences that putatively create the impression of supporting the establishment of any kind of faith-based university or even government-owned university. Yet, the NUC has licensed more than 35 private universities since 1999, most of which are faith-based universities without any acrimony of any kind from any religious quarter or any group, for that matter.The CBN leadership has also embarked on promoting the Yuan to justify its intent to whittle down our dollar-held foreign reserves. There may be valid reasons to spread the risks of our foreign reserve portfolio. But whether the Yuan 'will inevitably become a global reserve currency' or not in which Nigeria will domicile its foreign reserves is none of Nigeria's business.Why can't the CBN work to make the Naira a global reserve currency' Why should we hope that 'Beijing would allow the Nigerian government to use Yuan to buy yuan-denominated bonds in Hong Kong and Shanghai, while Nigeria may allow Beijing to settle its Nigerian oil purchases in Yuan'' How will this dissipation of energy improve electricity supply, reduce poverty and diseases, improve our decrepit education sector, and myriad of development challenges facing Nigeria'What competitive advantage do the above official statements of CBN confer on Nigeria' Why should we be proud that a non-tradable foreign currency is being hawked on the streets of Nigeria' Will Chinese monetary authorities permit the Naira to trade freely on its streets' We must not, as a nation, trade away our sovereignty on capricious selfish desires or covert interests of few officials who are opportune to be in authority.Instead, we should be challenged by what China, that was lower in the rungs of economic development ladder than Nigeria in the 1960s just like Malaysia, has been able to accomplish within the same period that Nigeria has been toddling.Our monetary authorities should be challenged that a fellow developing country is striving assiduously to make its currency more convertible. If the dollar, which is a highly held international convertible currency, is prone to the fluctuations of foreign exchange exposure, what less do we expect from a developing economy that is inherently weak by its very socio-political nature' By exposing our reserves to the vagaries of a country that can turn and twist at any time, whose market is closed to international participation, unlike the USA, do we expect less fluctuation'China's sociology, philosophy of business and governance and demography, etc., are rooted in configurations that are different from those of market-based economies' There must be other strong considerations why the US dollar happens to be the most actively used international currency in the world.I think the CBN should be more concerned about safety and confidentiality in its foreign currency reserve diversification policies rather than canvassing the case for the Chinese Yuan. If China wants to make its Yuan a convertible currency, since we can't make our own Naira, it should be left to the convenience of China's Central Bank Governor.Ezi-Herbert (KSC) is a Professor of Accounting and Financial Management, and International Financial Consultant.
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