Brazil and China to sign a currency swap agreement

Brazil and China have agreed to pay for trade transactions in local currencies (the real and the yuan or renminbi). The currency swap agreement will be backed by $30 billion (R$60 billion or 190 billion yuans).

In 2011, bilateral trade between Brazil and China was worth $84.5 billion, with a surplus for Brazil.

The agreement was reached yesterday, Thursday, June 21, at Rio+20, during a bilateral meeting between president Dilma Rousseff and the Chinese prime minister, Wen Jiabao. According to Brazil’s minister of Finance, Guido Mantega, final details will be worked out and a formal agreement signed next week.

China has become Brazil’s biggest trade partner, surpassing the United States. Mantega said the reason for the local currency agreement is to shield the two countries from the international economic crisis, allowing them to withdraw funds for reciprocal investments. Mantega pointed out that as a further worsening of the global crisis could alter the availability of commercial credit, with the agreement both Brazil and China will have more transaction security as they will be able to count on a reserve in local currencies. Mantega went on to call the agreement a precautionary move, a hedge, against a more aggravated crisis. The minister described the Brazil-China deal as taking place against a backdrop of a “stressed” world economy.

The minister also revealed that similar currency swap agreements (“crédito recíproco”) were under study with all the members of the BRICS group of nations (Brazil, Russia, India, China and South Africa). “First, China. After we have worked out the configuration of the reserve fund, will we expand to include the others,” said the minister, adding that the BRICS reserve funds add up to $4.5 trillion.

“We are acting taking into consideration that developed nations are in crisis and that the world’s most dynamic economies are in emerging countries, the BRICS, and it is necessary to share the dynamics. The BRICS are a partnership that is working out precisely because they are countries that are growing dynamically,” said Mantega.

The minister of Finance explained that Brazil saw an opportunity to “open doors” in China when the markets in Europe and the United States slowed down due to the crisis.

Although Brazil’s exports to China are mostly commodities, Mantega sees a chance to sell more manufactured goods. “The scenario is different. The situation in Europe has gotten worse and markets are stalled. This makes it more attractive to do business with Brazil. Advanced countries are being left behind and emerging nations are moving ahead,” concluded the minister.