Yuan Devaluation Effect on the Nigerian Economy

Today, China is an upper middle income country with more expensive labor. Their economy is increasingly based on domestic innovation, consumption, and exports of high-tech products. Chinese firms have become significant foreign investors themselves with interests outside China’s borders.

 This has been mainly good news for Africa. China’s growing reserves were recycled into large loans for infrastructure finance across Africa. Prices

for African commodities rose with Chinese demand and this  helped to underpin a long period of sustained growth in Africa. Trade between Africa and China increased to $220 billion in 2014. Consumers benefited from low cost cell phones and other goods. However, African manufacturing suffered from the competition with Chinese imports. Economic critics are of the opinion that the economic association with China has not taken African economies away from high dependence on raw material exports.The devaluation is a step backward in China’s  strategy.

In 2015, China’s economy began to slow a bit too rapidly. The Chinese had been using their foreign exchange reserves to prop up the yuan against the challenge of a strong dollar. This pushed their currency  to appreciate by 14% over the past twelve months.

The stronger yuan led to a drop in Chinese exports by 8.3% in July alone. That month, China’s factory sector experienced its largest fall in two years and this led  to job layoffs. Combined with the recent stock market crash.

Last week’s decision by the Chinese financial authorities allowed the market a greater role in setting the yuan’s value and this led to the Yuan's fall. This is expected to lead to a modest export recovery for China, but will do little for the long term goal of continued transformation already earmarked by the government.

So far, China’s devaluation has been fairly modest at about 4%, but this is expected to have some impacts on the Nigerian economy. How will that be? Prices for African commodities will worsen but will later improve. In recent years, China’s slower growth has  pushed down prices  for gold, crude oil, copper, platinum and iron ore. South Africa’s mining sector was expected to lose over 10,000 jobs due to lower demand. In response to China’s devaluation, global prices for crude oil and some other African commodities also fell.

These goods have now become more expensive for Chinese buyers using yuan to buy inside China and this lead to even lower demand. Yet over the medium term, if growth in China picks up as a result of the yuan devaluation, demand for Africa’s commodities will increase, and prices should recover.

The devaluation also means Africa will import more from China. Cheaper Chinese exports will please African consumers while putting Africa’s manufacturers at a further disadvantage. There will also be more pressure for tariff protections.

Lower cost steel imported from China will hurt African steel producers, but will benefit other manufacturers who use steel in their products. Chinese tourists will be more likely to go o. vacation at home, since African safaris become relatively more expensive.

Additionally, China’s African investments will be both helped and hurt. The appreciation of the Chinese yuan had reduced the value of profits from Chinese investments abroad when transmitted back to China  and exchanged into yuan. Now, Chinese investors will see their profits from African investments automatically rise and this could lead them to expand.

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