The Chinese Yuan is growing in importance as a global currency, and this trend has been especially apparent since the 2008 financial crisis. Several countries including Japan, Australia, and Brazil have set up bilateral trade agreements that stipulate that more trade between China and these countries will take place in their local currencies (the Yen, the Australian Dollar, and the Real), as well as in the Chinese Yuan. A consequence of this is that the U. S. Dollar will be used less frequently.
In the past couple of days, we have seen a couple of announcements from two African countries — Nigeria and Zimbabwe — which indicate that this trend is set to continue.
On January 28, Nigeria’s central bank announced that it intends to increase its Yuan holdings from 2 percent of total foreign exchange reserves to 7 percent. It will sell U. S. Dollar holdings in order to accomplish this. This means that Nigeria will sell roughly $2.15 billion worth of Dollars in order to buy Yuan.
The next day, Zimbabwe’s central bank announced that it is going to make the Chinese Yuan — among other Asian currencies — as one of the official currencies that is used in Zimbabwe. Recall that the Zimbabwe Dollar collapsed during the financial crisis, and as a result, Zimbabwe’s economy has been functioning without an official currency since February, 2009. Instead, it has been using other currencies including the U. S. Dollar, the South African Rand, and the Botswana Pula. But given the increase in trade between Zimbabwe and Asian countries — most notably, China — the central bank has decided to acknowledge this by making the Yuan, the Yen, and the Australian Dollar “official” currencies.
From a supply-demand perspective, this doesn’t materially alter the fundamentals of the Yuan or of the U. S. Dollar. Nigeria has just $43 billion in foreign exchange reserves, and so the proposed increase in Yuan holdings from 2 percent to 7 percent is just $2.15 billion. Furthermore, Zimbabwe’s economy is miniscule. It has an annual GDP of just $10 billion, which is far smaller than the daily GDP of the United States.