After Nigeria, Brazil may be next to diversify into yuan

Brazil may follow in Nigeria’s footsteps and diversify its foreign exchange reserves into yuan, which would bring more sovereign demand into the offshore renminbi market.

Nigeria’s central bank governor Lamido Sanusi said Africa’s second-largest economy will start holding yuan as part of its reserves from the next quarter, an allocation of as much as 10 percent, and will look at investment opportunities in the offshore yuan market.

The African nation’s decision was not taken overnight. Over the years, trade ties between China and Nigeria have strengthened dramatically and annual trade between the two is set to cross $13 billion this year alone, a four-fold increase from 2006. It was relatively non-existent before 2000.

About 15 percent of all its imports are from China and the bulk of its oil exports, of which it is a major producer, goes to China. China has invested billions of dollars in developing refineries, ports and telephony infrastructure over the years.

As a result, Nigeria is among the top five export markets and trading partners of the Middle Kingdom in Africa and small wonder that its authorities want to reduce the reliance on dollars and euros as invoicing currencies for trade.

Next to follow may well be the economic powerhouses of Latin America.

According to a study done by Gavekal strategists Will Freeman and Benjamin Lopez, trade between China and Latin America has grown faster than any other two major regions in the last decade.

Latin America is China’s biggest supplier of primary commodities, excluding fuel. Mining giant Vale — the world’s biggest producer of iron ore — counts China as its single biggest customer.

From 2000-2010, China’s share of Latin America’s trade jumped to 10 percent from 2 percent and the Middle Kingdom is the top trading partner for two of the most developed nations – Brazil and Chile.

Last week, a Chinese group of five state-owned enterprises paid $1.95 billion for a 15 percent stake in Brazilian niobium producer, Companhia Brasileira de Metalurgia e Mineracao (CBMM), the world’s top niobium producer.

About $23 billion in foreign direct investment deals was announced in 2011, Gavekal said citing the U.N. Economic Commission for Latin America. Total foreign direct investment was a mere $7 billion between 1990-2009.

With China finding itself in a strong financial position compared to the West, Lamido Salusi, Nigeria’s central bank governor told Reuters the move to diversify into yuan is,” a very wise move at this point in time and forward looking.”

Brazil, which sits on top of a $352 billion reserves pile would certainly think about that.

REUTERS