BEIJING (Reuters) - China’s yuan will inevitably become a global reserve currency, Nigeria’s central bank governor said, adding his country’s need to diversify reserves grew more urgent after one credit agency stripped the United States of its top-notch debt rating.
A day after Nigeria said it would diversify a tenth of its $33 billion foreign exchange reserves into the yuan, Lamido Sanusi said Beijing would allow the Nigerian government to use yuan to buy yuan-denominated bonds in Hong Kong and Shanghai.
In a separate interview with Reuters Insider on Tuesday, Sanusi said euro holdings would be decreased to make way for yuan holdings.
Welcoming the access that Nigeria gets to China’s tightly-controlled capital markets, Sanusi said his nation may allow Beijing to settle its Nigerian oil purchases in yuan.
He said the two countries may also set up a currency swap, but he did not say how big that may be.
“There is already renminbi being traded on the streets of Nigeria, so this shows the market is ahead of us and we are just catching up,” Sanusi told reporters in Beijing, noting that China is making the yuan more convertible.
The renminbi is another name for the yuan.
Dressed in a grey-checked Nehru jacket, Sanusi, whose father was Nigeria’s first ambassador to China in 1972, said he looks forward to China investing more in his country, especially in the energy, agriculture and processing sectors.
“The U.S. debt crisis has added a sense of urgency” to Nigeria’s decision to diversify its reserves away from the dollar, Sanusi said. Presently, 79 percent of Nigeria’s reserves are invested in dollars, he said.
“(It) appears to me there is less and less appetite for holding dollars,” he said.
Global stock markets were roiled last month after Standard & Poor’s stripped the United States of its AAA debt rating, fuelling some investor fears that the dollar may be debased in the long run owing to America’s yawning deficit.
However, U.S. credit markets actually strengthened as investors flocked to U.S. Treasuries as safe haven investments.
A weaker dollar hurts China since it is heavily invested in the dollar too. About two-thirds of China’s $3.2 trillion reserves are estimated by some economists to be parked in the U.S. currency.
But at the same time, China hopes to benefit from a weaker dollar by pushing for the yuan’s use in international trade and investment. To that end, Beijing has made it slightly easier in the past year for foreign investors to hold yuan.
Sanusi told Reuters Insider in an interview that the central bank aims to hold up to about $3 billion worth of yuan, or 10 percent of the current holdings, in its foreign currency reserves over time, but declined to give further details.
“We are probably not going to start with $3 billion from day one,” he said, but added that the central bank will hold a “certain” amount of yuan in reserves before the end of 2011.
Sanusi said Hong Kong’s exploding offshore yuan market, where the currency is already fully convertible, will be another place where Nigeria can invest its yuan holdings in the future.
Nigeria’s plan to hold yuan as a reserve currency — a key step to diversify its foreign currency reserves — was driven by Beijing’s efforts to internationalise the yuan and promote its use in trade and investment, Sanusi said.
China has signed bilateral currency swap deals with 11 trade partners since the end of 2008 to boost the yuan’s global role.
“The time has come. The reform has gone far enough for us to hold yuan in reserves,” he said.
Right now, the U.S. dollar makes up for about 79 percent of Nigeria’s reserve holdings. Sanusi said dollars would still account for a large portion of reserves even if Nigeria diversifies into the yuan, but its euro investment could fall.
“The significant part of (trade) transactions are still settled in dollars — we do get paid in the dollar. So the euro component will suffer a bit more,” he said.