China and Argentina have agreed to swap US$10.2 billion worth of currency. This will give the country a reserve fund and enable the Argentine economy to avoid using dollars in bilateral trade.
Additionally, this deal will allow Argentina to use yuan instead of dollars in trade with China. The payment for imports will be done directly in yuan, while China will pay for its exports in pesos. International trade was previously done between the countries in dollars, but this new agreement will cut out this middle currency.
This is the first currency swap that China has made with a Latin American nation. The preliminary agreement was signed last week during the annual meeting of the Inter-American Development Bank (IDB) held in Medellin, Colombia.
The arrangement will allow Argentina to borrow from a reserve fund in times of financial need. The swap gives the country a credit of up to 70 billion yuan, which is equivalent to around US$10.2 billion. The agreement is for a minimum of a year and a maximum of three.
This operation is similar those made between the US Department of Treasury and countries such as Brazil, Mexico, Turkey and Singapore.
“Argentina was not on this list, which is almost a pariah, but this move sends an important message to the market amid the uncertainty that always generates elections,” said an analyst of JP Morgan who wished to remain anonymous.
The agreement was signed by Zhou Xiaochuan, head of the People’s Bank of China, and Martín Redrado, head of Argentina’s central bank.
China joined IDB last January and Zhou Xiaochuan attended last week’s meeting. He has said that IDB has become “the most important platform” for China’s dealings with Latin America.
For China, which is already involved in similar deals throughout Asia, this is bringing forward the yuan in a position as the hard currency of the world.
Redrado said that this will give Argentina a reserve that will enable it to avoid financial stress. Additionally, this will cut trading costs, give the country access to hard currency and strengthen its financial position during the current global financial crisis.