China - United States - Argentina - Brazil: A few yuan for the Americas

The announcement has moved the financial markets: Argentina and Brazil are abandoning the dollar in favor of the Yuan for their trade with China. Are we on the verge of calling the Monroe Doctrine into question? It doesn't seem so. Apart from Bolivia, nothing is changing in Latin America. So it will only be over time, by taking advantage of opportunities or the dollar's local failure, that the renminbi will gradually find the place Beijing may want it to have.

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On June 30, 2023, Argentina repaid its $2.7 billion share of the International Monetary Fund loan in yuan. This payment procedure enabled the country to avoid using the central bank's dollar reserves1 .

Argentina, plagued by galloping inflation (100% in one year), has long been short of dollars - a safe haven for all those with money - and has been looking for ways to survive economically. Now it's turning to China. So, after announcing that it would pay for its Chinese imports in yuan rather than dollars (Chinese goods imports amounted to 11 billion euros and Argentine exports to 7.5 billion euros in 2022), Buenos Aires is now committing itself even further by allowing commercial banks to open accounts in yuan. These measures are backed by the three-year renewal of a swap agreement covering 130 billion yuan for 4.5 trillion pesos. Added to this is the recent acceptance of UnionPay for the payment of non-residents' expenses2 . UnionPay is the main credit card used by the Chinese abroad, accounting for 75% of their spending in France.
 

Argentina was not the only country to turn to China. It had been preceded on March 23 by Brazil, which had signed an agreement with its leading trading partner stipulating that trade worth $150 billion would henceforth be settled in their respective currencies. To this end, the two countries announced the creation of a clearing house, with the Chinese central bank designating ICBC Brazil as the clearing bank for yuan payments3 . A decision welcomed by both sides: "The yuan reduces market risks and transaction costs.
 
Commenting on these decisions, Argentina's ambassador to Beijing, Sabino Vaca Narvaja, echoed the words of Brazilian President Lula Da Silva during his visit to China on April 14: "Why do all countries have to base their trade on the dollar? Why can't we trade on the basis of our own currencies?" He added: "Expanding the use of the yuan is possible because of the economic complementarity between China and most of the countries in the Latin American region." He could find encouragement in the statement by Bolivia's president, who on May 10 declared himself open to the use of the yuan for his modest, heavily deficit-laden trade with China.
 
Are these to be seen as decisive breakthroughs and a major challenge to the Monroe doctrine? This is not certain. There is a risk that Brazil and Argentina will remain isolated and that their example will not be followed. Either because, like Mexico, the countries concerned maintain very close relations with the United States or, as in the case of Chile and Peru, because their trade balance with China is profitable and it is not in their interest to see the yuan replace the dollar in their surpluses.
 
So we shouldn't expect to see an American surge in the yuan. Rather, it should only be in stages over time, taking advantage of opportunities or a local failure of the dollar, that the renminbi will find the place in the world, and particularly in Latin America, that China can hope to see it find.
 

1. Argentina's central bank enables yuan deposits for local bank accounts, Xinhua01/07/2023.
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2. Argentina's central bank enables yuan accounts, a great advancement in promoting financial efficiency: envoy? Global Times, 06/30/2023.
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3. Brazil-China-sign-agreement-to-drop-us-dollar-and-use-rmb-yuan-real-in-bilateral-trade, Silkroadbriefing, 31/03/2023.

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Box 1
Swap agreement

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This is an agreement between two central banks to exchange currencies. It enables them to obtain liquidity from their respective central banks. These are then made available to commercial banks operating on the domestic market.
Thus, through the swap agreement between the US Federal Reserve and the ECB, national central banks in the euro zone can receive dollars from the Fed in exchange for an equivalent amount in euros.

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 EV

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