China Visit: Explaining The Yaun Deal In Simple Terms

The Chinese Yaun deal is an economic move president Muhammadu Buhari took in his visit to China, but what does this move mean to the Nigerian economy? Very simple economics, We buy most of our goods from China, and we pay the Chinese in dollars, The Chinese buy a lot of crude oil from us, and they also pay us in dollars. So the President made a deal with the Chinese, We pay for the goods we buy from China in Yuan, the Chinese currency and they buy our crude oil and pay in Yuan. The exchange rate is to be pegged at 30 Naira to one Yuan or RMB.

So what is strategic about this move, well the Yuan is now 6.48 to a dollar, So if you pay 30 Naira to the Yuan, that would be equivalent to 194.4 Naira to the dollar. Since the dollar exchanges for 199 Naira, you save N4.6. 199 – 194.4 = 4.6.

In simple terms, PMB has just strengthened the Naira by 9.15%! And that’s not the end of the story. As we begin to deal in the Yuan, the demand for dollar would plummet and this in turn would weaken the dollar. It would crash to around 140 Naira to the dollar.

This move by the Buhari administration is almost a strategic one. You’d recall that the Naira/USD exchange rate took a dive during those troubled periods once Nigerian importers who had made deposits with Chinese firms began to source for dollars to meet their varying commitments. That exchange rate would have seen less pressure, were they sourcing for the Yuan instead, a currency Chinese firms will accept. The trade between Nigeria and China was once recorded at over $11b dollars with, of course, the imbalance being to Nigeria’s disfavour. But that’s not the point; Nigeria has never really been an exporting country.

Nevertheless, it’s obvious there’s a lot of trade going on between the two countries. Since you couldn’t exchange Naira directly for Yuan, but had to first obtain the USD, the various additional costs incurred during the two-stage transaction ensured Nigerian firms spent more money doing business with Chinese firms. In addition, by not first exchanging to the USD Nigeria can start reducing its dependence on the dollar. And now, I don’t have to tell you how much the greenback swings the Nigerian market.

Not to get it wrong though. This will not increase the money in Nigeria’s pocket, neither will it completely eliminate dependence on the dollar since some countries will not accept the Yuan while trading with Nigeria. In fact, Nigeria will have to convert a sizeable amount of its earning to the Chinese legal tender causing the country to hold less dollar. However, if a significant amount of trade is happening with China, there is no reason the Nigeria shouldn’t have a Yuan trading hub.

The Naira will be the latest in a string of currencies which currently trade with the Yuan. There is already direct trade with the dollar, euro, yen, pound, the Australian Aussie, the New Zealand dollar, Russia’s rouble, Swiss francs, the Singaporean dollar and the Malaysian ringgit. By joining the list of these countries, Nigeria is expressing its desire to take China seriously as a global economy and directly take on the benefits that come with that.