China’s recently announced $2.5 billion currency swap with Nigeria raises interesting questions about Africa’s role in one of Beijing’s key financial objectives: the internationalization of the renminbi (RMB). The swap follows the March launch of an RMB-denominated oil futures market in Shanghai. As the world’s largest oil importer, conducting its oil purchases in its own currency would save it the costs of converting it to dollars. It also means chipping away at the dominance of the dollar in the international oil trade.
But what would it take to replace the petrodollar with a petroyuan? It probably won’t happen quickly.
Traders can’t freely move RMB in and out of the new Shanghai oil futures market yet. In fact, capital and currency controls remain the main barrier to the internationalization of the RMB. In the second place, the petroyuan would need support from the world’s major oil producers. This seems slightly more likely. Russia has already conducted oil trade with China in RMB. U.S. President Donald Trump’s recent demolishment of the Iran nuclear deal has pushed Iran towards China, and boosted the new oil futures market.
But many oil powers are still not on board yet – the future of the petroyuan depends in large part on whether China can convince Saudi Arabia to trade in RMB. At present, this is still unclear. However, in the long process of gathering all its oil suppliers under an RMB umbrella, China’s relationship with African oil giants could be important. Both Nigeria and Angola are vulnerable to fluctuations in the oil price, and the costs of dollar conversion.
Could African oil states become early adopters of the petroyuan? The currency swap with Nigeria will certainly make such a shift easier.
— Cobus van Staden
[COMMENTARY] Africa and the slow rise of China's new "petroyuan"
