How China expands the yuan’s influence in Latin America – 05/28/2023 – Market

You may not see it in the prices of the country’s cars or appliances, but the yuan, the currency that China promotes as an alternative to the dollar, is opening up a growing space in Latin America.

Some signs of this have emerged in recent weeks.

In Argentina, the government announced last month that its purchases from China would now be paid in yuan instead of dollars, to preserve its weakened international reserves.

And here in Brazil, where the yuan has overtaken the euro as the second largest foreign reserve currency, the government has also announced an agreement to trade with China in both countries’ currencies and avoid resorting to the dollar.

These changes in two of the largest Latin American economies are pointed out by Bolivian President Luis Arce as part of a regional “trend” that his country can adhere to.

But it is also seen by experts as reflecting China’s commitment to making its currency more international, amid an increasingly intense struggle with the United States.

“There are several mechanisms that China can use to introduce its currency to different markets; it’s a regional phenomenon, not something unique to Brazil and Argentina,” says Margaret Myers, director of the Asia and Latin America program at the Inter-American Dialogue, a center of regional analysis headquartered in Washington, United States.

However, she warns in an interview with BBC News Mundo (BBC Spanish service) that it is not yet known how far this Asian currency boost will go.

“A Chinese Strategy”

Beijing has demonstrated its intention to increase the yuan’s presence in Latin America over the past decade, after becoming a major trading partner in the region and a source of finance for some countries.

In 2015, Chinese authorities signed investment and exchange agreements with Chile, where they announced the opening of the first yuan clearing bank in Latin America.

A few months later, they did the same in Argentina.

The purpose of these institutions, also known as clearing houses —or clearing houses— is to facilitate international transactions between the local currency and the yuan, without the need to go through the dollar, as is often the case.

In February, after yuan compensation agreements in other regions, China announced the same measure in Brazil, its largest trading partner in Latin America with a bilateral exchange that in 2022 reached a record of US$ 150 billion (about R$ 750 billion).

Operated by the Industrial and Commercial Bank of China, an important financial player that guarantees Brazilian businessmen the immediate conversion of trades closed in yuan into reais, the compensatory mechanism in Brazil processed its first international settlement operation in Asian currency in April.

With a considerable volume of bilateral exchange, this mechanism can theoretically make operations in yuan more attractive because it avoids double conversion into dollars, explains Welber Barral, former secretary of Foreign Trade in Brazil.

“It’s a Chinese strategy to try to make its currency convertible and more widely used,” Barral tells BBC News Mundo.

But he points out that more than 90% of Brazilian foreign trade is still done in dollars.

Although the yuan may gain more weight as a second currency in Brazil’s international reserves with recent agreements, it is still marginal against the dollar (the Chinese currency occupied less than 6% of that total in December, and the US more than 80%).

The Argentine Economy Minister, Sergio Massa, announced in April an agreement to stop paying for imports from China in dollars and start adopting the yuan, after activating a swap or financial exchange agreement with the Asian country equivalent to US$ 5 billion (BRL 25.05 billion).

In this way, Argentina officially calculated that in May alone its companies would pay with yuan more than US$ 1.04 billion (R$ 5.2 billion) for imports originating in China (from electronics to automobiles) and, afterwards, an average of US$ 790 million (R$ 3.95 billion) per month.

With these agreements, the Argentine government sought to preserve the country’s international reserves, which fell to worrying levels amid the economic crisis and as the Central Bank sold dollars on the exchange market to contain the devaluation of the peso.

In Bolivia, where international reserves also declined and dollars became scarce, the president mentioned the new use of the yuan in foreign trade in Argentina and Brazil as a possible way forward.

“The region’s two largest economies are already trading in yuan in deals with China,” Arce told a news conference this month. “The trend in the region will be this,” he added.

“Who decided?”

Of course, geopolitical factors also play a role in all of this.

Different analysts believe that China has redoubled its desire to internationalize its currency not only as a way to boost its foreign trade, but also to erode the power that the US dollar has had for decades.

International sanctions on Russia for invading Ukraine appeared to open up an opportunity for the Chinese currency to appreciate.

The yuan has displaced the dollar as the most traded currency in Russia this year, after accounting for 23% of Russian import payments in 2022.

And China, for the first time in March, used more yuan than dollars to pay for its international transactions, even though its currency handled less than 5% of world trade.

Some experts believe that by trying to reduce dependence on the dollar, Beijing wants to protect itself from the risk of future dollar sanctions.

China has also struck recent deals with other trading partners — from Pakistan to companies in France — to facilitate yuan exchanges, has developed its own digital currency and an alternative to Swift, the global interbank messaging network.

At the same time, questions have also arisen in Latin America about the primacy of the dollar.

President Luiz Inacio Lula da Silva has suggested adopting a different US currency to finance trade between the BRICS countries (Brazil, Russia, India, China and South Africa).

“Who decided that the dollar should be the currency after gold disappeared as a currency?” asked Lula during his visit to China in April.

“We need to have a currency that transforms countries into a slightly more peaceful situation”, he said, “because today a country needs to run after the dollar in order to be able to export”.

But, according to experts, the key here is that the dollar tends to attract international demand for safe assets and it is difficult for the yuan to compete in this regard without China relaxing its own capital restrictions.

Myers considers that an explosive increase in the use of the yuan in Latin America after the announcements in Argentina and Brazil is unlikely, even if the currency has a greater presence in the region.

“We see growth in the use (of the yuan) and a real effort from China to make that happen,” he says. “But the degree to which it will be used as a global currency depends on China’s own internal reforms and how much it opens up its financial markets. And that is not happening.”