Lula politicizes the use of the Chinese currency in transactions with the real

The announcement that Brazil and China will be able to carry out commercial transactions directly in their currencies, without going through the dollar, does not exactly involve the best of scenarios. It takes place at a time when the Chinese currency, the yuan, is ostensibly used by Russia to escape international sanctions resulting from aggression against Ukraine. At the same time, the agreement with Brazil is part of a concerted effort by the Chinese to reduce their own exposure to the dollar, in the context of their struggle with the West for global power and influence.

So many sensitive geopolitical issues naturally raise reservations regarding the need and momentum of the bilateral agreement. On his visit to China, President Luiz Inácio Lula da Silva went further and embarked on an anti-American speech, stoking the political symbolism of the Brazilian decision, and asked: “Why can’t we carry out our trade backed by our currency? Who decided it was the dollar?”

It is part of the political game to raise smoke, to question the reasons for using the dollar, yuan or any other currency in international trade. In practice, however, the dollar dominates global transactions due to the fundamentals of the American economy, which has an open capital market, high liquidity of its assets and functions in a democratic and transparent environment. “Would you be more confident in having dollars or yuan kept at home?”, provokes Paulo Molinari, consultant at Safras & Market agency.

Brazil is late to yuan business

Ideologies aside, those who advocate oiling exchanges with Chinese currency resort to the economic pragmatism demonstrated even by the United States itself in its relationship with China. Americans now have a “clearing house” – a financial institution for clearing currencies – which handles nearly 3% of transactions in yuan in international markets. JP Morgan was chosen for this by the People’s Bank of China, the Chinese central bank, in 2018.

“We are actually late. These clearing houses have existed since 2008. China now has more than 27 of them around the world, including the US. There is not only a Chinese bank, but JP Morgan also does this work. And that’s how it is in Japan, UK, Australia and Canada. It goes beyond exchange rate closings, it also involves loans, deposits, financial investments and derivatives”, says Sergio Quadros, responsible for installing and opening the first Banco do Brasil branch in China, and who is currently head of SQ Asia Business Consulting.

In the evaluation of the specialist in the Chinese market, the installation of banks to clear transactions in yuan and real will open up a range of business opportunities. China is Brazil’s main trading partner, the destination of almost a third of total exports. The trade flow – sum of imports and exports – with the Asian country moves US$ 150.5 billion per year, while with the United States, in second place, trade reached US$ 88.7 billion in 2022.

Use of the yuan may enable more Chinese to import from Brazil

“Small, medium and even large companies have a currency exposure limit within China. Trading in yuan may allow you to increase imports of Brazilian products. It can benefit Chinese companies that are sometimes unable to access the market due to difficulties with a credit line in foreign currency. New market niches should open up for Brazil”, underlines Quadros.

Emphasizing “also being a conservative”, Quadros complains about a Brazilian “mindset” that, in his view, tends to align itself with North American interests, without counterpart. “We were looking at the US as if they were going to save us from something. They never saved us and they never looked at Latin America the way they look at Europe and Asia. They didn’t make the same efforts for our industrialization as they did for Japan and China itself. So Brazil has to take a leap of independence, without ideological or political bias, but being pragmatic and making agreements with the whole world”, he evaluates.

Increasing business in national currencies, reducing dependence on the dollar, is a strategy studied for years by the countries that make up the Brics, a bloc that brings together Brazil, Russia, India, China and South Africa. Who may play a role in the next steps in this direction is former president Dilma Rousseff, who, appointed by Lula, has just taken over as president of the bloc’s bank, the Novo Banco de Desenvolvimento (NBD). “I am certain that the arrival of President Dilma will contribute to this process”, said Lula.

Like Russia, China wants less exposure to embargoes

In Brazil, the bank that will clear the renminbi, the official name of the Chinese currency, will be Bocom BBM, a branch of the Industrial and Commercial Bank of China (ICBC), the largest bank in the world. The country will thus participate in the payment platform China Interbank Payment System (Cips), which operates in an equivalent way to the Western Swift system, used by thousands of financial institutions around the world.

Since the beginning of the Ukraine war, CIPS has been increasingly used by Russia as an escape valve from sanctions applied via Swift. In the event of an invasion by China of Taiwan, Swift would certainly be used by the US as a boycott tool.

The advance of the yuan as a global currency is taking place in the Chinese style, detached from the previous history of the pound sterling and the dollar, for example, which grew in the 20th century due to their high liquidity and market liberalization. The internationalization intended by China, according to a study published last year by the European Economic Policy Research Center (Cepr), does not involve opening up its capital market, due to the fear of being exposed to imported crises and losing rigid control of the economy. .

Instead, China is betting on a multipolar world involving several coexisting currencies, such as the euro, dollar and yuan. With that in mind, the Chinese are sewing agreements to offset payments with yuan, which ends up, by default, leading countries to build up reserves in the Asian currency.

In Brazil, even without a clearing house, reserves in yuan reached 5.37% of the total in foreign currency in 2022, surpassing reserves in euros (4.74%), against 80.42% in dollars. Around the world, central banks hold reserves equivalent to around US$300 billion in yuan.

In agro, almost everything is indexed to the dollar

The Brazilian agribusiness has China as the destination of 31.9% of all its exports, and works largely anchored in the dollar. It is no exaggeration to say that rural producers lead a life indexed to the American currency – from the prices of fertilizers and pesticides to the final value of a sack of soybeans or corn, all calculations are done in dollars.

In this habitat, the possibility of doing business in yuan initially has little appeal. But if an eventual cost reduction in the exchange rate changes the price paid to the producer, the game could change, according to Sergio Quadros. “Everything depends on the pass-through of the cost reduction in the exchange rate. The producer will make his calculations at the time of closing the contract, to know if he will use the dollar or the yuan”, he points out.

There are, on the other hand, those who see very remote chances that any gain in terms of cost reduction could reach the producer. “It is an expense that can be reduced for the trading company or the bank, not for the producer. In fact, these financial operating costs may even increase in a transaction with yuan”, evaluates Paulo Molinari, consultant at Safras & Market agency.

In principle, there is no risk, nor fear, that the dollar will be replaced by the yuan or any other currency in the short term. Although the United States accounts for 10% of global trade, the dollar is present in 40% of transactions, while the yuan accounts for 4%. There is, however, concern about the future political and economic effects of this adherence to the Chinese system, which openly seeks to rival the American currency.

Agro fears giving too much power to its main client

In theory, a scenario is created in which China, the main destination of our agricultural exports, could reach the point where it feels more comfortable exercising its bargaining power and trying to impose prices below the international quotation.

“It is the biggest buyer of soybeans, so suddenly, in a bilateral situation, it may want to buy soybeans in yuan cheaper than what Brazil sells to the rest of the world. This is a derivation that we will only get to know later on. But changing currency doesn’t change anything. What matters is the pricing, which, in soybeans, means Chicago more premium. It is difficult to change this logic. What changes is that instead of having a settlement only in dollars with China, we are going to have a settlement in yuan”, says Molinari.

In a first assessment, producers tend to be on the back foot in relation to deals in Chinese currency. “If you think about it, China owns almost everything. From companies that buy production to those that sell inputs. It’s a very big risk. Our dream would be for us to control the price, but that doesn’t happen. Good or bad, we have this solid market, quoted in dollars, which has existed for a long time and which everyone trusts”, evaluates farmer Zezé Sismeiro, vice president of the Association of Soy and Corn Producers in Brazil (Aprosoja) .

Pricing will continue to be done by the dollar and Chicago

In agricultural commodities, the strength of the Chicago Board of Trade, which regulates global soybean and corn prices, goes beyond currency. “It is the reference square for knowing the balance of supply and demand for grains worldwide. I think it’s positive that there is this possibility of offsetting transactions in local currencies. But for those who deal with commodities, the most natural thing is to keep the transaction in dollars. The asset itself is priced and operated in dollars”, evaluates Felippe Serigati, a professor at the São Paulo School of Economics at the Getulio Vargas Foundation (FGV).

Not even analyst Sergio Quadros, who is in favor of trading with yuan, sees threats to the dollar-backed system. “The dollar will continue to be the dominant trading currency for a long time. The yuan comes in as one more option for companies to do their business with China,” he says.

Serigati, from the FGV, assesses that with regard to commodities there is a risk of higher costs when operating outside the unit of measurement of the product itself, which today is still the dollar. He sees, however, potential to increase business in other commercial exchanges.

“If it’s a machine or equipment, if Lula goes there, for example, to sign contracts for paper and cellulose vessels, maybe it makes more sense, because there isn’t an international market for that. Even more so if it is associated with a line of financing. But in the case of commodities, it’s difficult. You will incur an additional transaction cost in this process. [se usar yuan]”, it says.

Lula’s bravado causes unnecessary uneasiness with the US

The creation of clearing mechanisms in local currencies, in itself, is not bad for commercial relations. But it is a game that needs to be played with an eye on the consequences for multilateral relations. Felippe Serigati assesses that Brazil needs to be very careful and diplomatic when taking measures that change the geopolitical map.

“Perhaps in the future, I hope it is not close, Brazil will have to say which block, in this division, it belongs to. Whether to the western bloc or the Chinese-Russian bloc. At the moment, when we are not being strongly pressured to say which side we are on, we have to maintain the maximum possible neutrality. The time will come when someone out there will say that you can’t stay on top of the wall anymore. As long as we can maintain this more neutral posture, I think it’s only advantages for us”, he concludes.

Consultant Sergio Quadros, in turn, makes another reading. According to him, diversifying currencies reduces risks. “For China, the clearing house is much more a geopolitical move to prevent possible US sanctions. But, if something happens to Brazil down the road and it suffers sanctions, what would the relationship with the rest of the world look like if we can’t use the dollar?”, he asks.

Anyway, in the geopolitical and trade battle between the two main global economies, which coincidentally are Brazil’s two biggest trading partners, what nobody disagrees with is that any step, on this side, has to be calculated to the millimeter. Shouting bravado against the dollar, as Lula did, does not seem to add much to Brazil’s interests.