This is how China promotes the influence of the yuan in Latin America

You may not see it in the price of cars or household appliances in your country, 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 from the south of the region in recent weeks.

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

And in Brazil, where the yuan has supplanted the euro as the second largest foreign reserve currency, the government has also announced an agreement to trade with China in the currencies of both countries 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 could join.

But they are also seen by experts as reflections of China’s commitment to make its currency more international, amid its increasingly intense struggle with the United States.

“There are several mechanisms that China can use to introduce its currency in different markets; it is a regional phenomenon, not something exclusive to Brazil and Argentina,” Margaret Myers, director of the Inter-American Dialogue’s Asia and Latin America program, told BBC Mundo. a regional think tank based in Washington.

However, he cautions that it remains to be seen how far this Asian currency push will go.

Beijing has shown its intention to achieve a greater presence of the yuan in Latin America over the last decade, after becoming a key trading partner in the region and a source of financing for some countries.

In 2015, the Chinese authorities signed investment and currency 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 objective of these institutions, also known as clearing houses, is to facilitate international transactions between the local currency and the yuan, without having to go through the dollar as is usually the case.

China has struck yuan offset deals in other regions and in February announced one in Brazil, its largest trading partner in Latin America with a bilateral exchange that in 2022 reached a record $150 billion.

Operated by the Industrial and Commercial Bank of China, a financial heavyweight that guarantees Brazilian businessmen the immediate conversion to reais of deals closed in yuan, the compensatory mechanism in Brazil processed its first cross-border settlement operation in April asian currency.

With a considerable volume of bilateral exchange, this mechanism can theoretically make operations in yuan more attractive because it avoids double conversion through the dollar, explains Welber Barral, former Brazilian Secretary of Foreign Trade.

“It is a Chinese strategy to try to make its currency convertible and more widely used,” Barral told BBC Mundo.

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

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

For his part, the Argentine Minister of Economy, Sergio Massa, announced in April an agreement to stop paying imports from China in dollars and start doing so in yuan, after activating a swap or financial exchange agreement with the Asian country equivalent to $5 billion.

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

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

In Bolivia, where international reserves have also been reduced and dollars have become scarce, the president cited the new use of yuan in the foreign trade of Argentina and Brazil as a possible way forward.

“The two largest economies in the region are already trading in yuan in deals with China,” Arce told a news conference this month. “The trend in the region is going to be that.”

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

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

International sanctions on Russia for invading Ukraine seemed to open an opportunity for the Chinese currency to advance.

The yuan displaced the dollar as the most traded currency in Russia this year, after it accounted 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 moved less than 5% of world trade.

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

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

In parallel, questions have also arisen from Latin America about the primacy of the dollar.

Brazilian President Luiz Inácio Lula da Silva suggested adopting a different currency from the US 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 parity?” Lula asked during a visit to China in April.

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

But, according to specialists, 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 easing its own capital restrictions.

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

“We see growth in (the yuan) use and a real push from China to make it 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’s not happening.”

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