Home News & Analysis China Economy: Swaps $10 Billion of Currency with Argentina

China Economy: Swaps $10 Billion of Currency with Argentina

By: CaraTan Date: 1 April 2009

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Beijing, 1 Apr. China has long sought ways to bypass the US dollar and allow other countries to by their imports directly in yuan. This new $10 billion currency swap with Argentina means that Argentina will have much-needed cash

The agreement brings China one step closer to forging more direct ties with South America, something it has been trying to do for a long time. In the past, China has put forth the idea of establishing a new global currency to bypass the US dollar.

China says discussion of this new proposed currency will be on the upcoming G20 summit agenda in London. It would be an enhanced variant of the IMF’s unit of account, the SDR (special drawing right).

“It’s unlikely that this new currency will be established anytime soon, but certainly China’s move to swap funds with Argentina will position Asian currencies, specifically China’s, as another standard unit of trade

,” commented EconomyWatch correspondent Hiroko Mirafiori.

Argentina holds $45.9 billion of reserves, the 29th most in the world. The US is ranked 23rd, with $70.5 billion. China holds a staggering two trillion, more than any other nation.

China is Argentina’s second biggest exporter, after Brazil, sending 9.4% of its goods there per year. The US is the third-largest, at 7.9%. Argentina’s main exports are agricultural – grains, meats, fruit, vegetables, and fish.

Argentina imports 12% of its goods from China, versus 12.6% from the US. The majority of its imports from China are electronic products and other manufactured goods.

China has sealed similar deals with Indonesia, South Korea, Belarus, and Malaysia in the past.

According to Xinhua, the official Chinese news agency, the agreement was concluded on Sunday by the governor of the People’s Bank of China ,Zhou Xiaochuan, and the Argentine central bank president, Martín Redrado. The deal was signed during an Inter-American Development Bank in Medellín, Colombia.

Flavia Cattan-Naslausky, RBS’s Latin America currency analyst, commented, “The fact that China represents such a small share of Argentina’s total trade (less than 12%) suggests limited impact on FX, but is an important political gimmick at this time (convertibility will remain an issue). Indeed, we have been talking out the view that it is in the [Argentinian] government’s best interest to maintain a stable exchange rate into the elections as a strong currency has been the pinnacle of the Kirchner’s economic plan and is essential for moderating capital flight.”

“More importantly is what this could mean for other Latin American countries should China extend this further across the region. Bilateral trade with the region adds up to USD112bn for which the top three are Brazil, Mexico and Chile,” she continued.

To put this $10 billion swap in perspective, the US Federal Open Market Committee (FOMC) authorized a $330 billion expansion of swap lines in September 2008 resulting in a total of $620 billion.

Chen Xiulian, EconomyWatch.com