How China promotes yuan influence in Latin America in the midst of its global battle with the United States

You may not see it reflected in the price of cars or household appliances in your country, but the yuan, the currency China is promoting 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 this last month your purchases from China would be paid in yuan instead of dollarsto preserve its weakened international reserves.

And in Brazil, where the yuan has displaced the euro as the second largest currency reserve, the government has also announced an agreement to trade with China in both countries’ currencies and prevent them from resorting to the dollar.

These changes in two of the largest Latin American economies are being pointed out by the President of Bolivia, Luis Arce, as part of a regional “trend” that your country could join.

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

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

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

“A Chinese Strategy”

Over the past decade, Beijing has shown its intent to make the yuan more present in Latin America, after becoming a major trading partner in the region and a source of finance 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.

They did the same in Argentina a few months later.

The purpose of these settings, also known as clearing housesis to facilitate international transactions between the local currency and the yuan, without the dollar as is usually the case.

China has signed yuan offset deals in other regions and in February announced an agreement in Brazil, its largest trading partner in Latin America with bilateral exchange reaching a record $150 billion by 2022.

The compensation mechanism in Brazil, administered by the Industrial and Commercial Bank of China, a financial heavyweight that guarantees Brazilian businessmen the instant conversion to reais of yuan-denominated deals, processed its first Asian-currency cross-border settlement operation in April.

With a significant volume of bilateral exchange, this mechanism could theoretically make yuan trading more attractive because it prevents double conversion via the dollar, explains Welber Barral, former Brazilian foreign trade minister.

“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 Brazil’s foreign trade is still in dollars.

While the yuan could gain weight as the second currency in Brazil’s international reserves with recent deals, it is still marginal against the dollar (the Chinese currency took up less than 6% of that basket in December and the US over 80%). .

For his part, Argentina’s Minister of Economy, Sergio Massa, announced in April an agreement to stop paying for imports from China in dollars and start paying for them in yuan, after activating a exchange or financial exchange agreement with the Asian country worth US$5,000 million.

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

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

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

“The two largest economies in the region are already trading yuan in deals with China,” Arce said at a news conference this month. “The trend in the region will be that.”

“Who decided?”

Of course, geopolitical factors also play a role here.

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

International sanctions against Russia for invading Ukraine seemed to open an opportunity for the Chinese currency to move forward.

The yuan has displaced the dollar as the most traded currency in Russia this year after accounting for 23% of Russian import payments by 2022.

And China used more yuan than dollars to pay for its international transactions for the first time in March, even as its currency moved less than 5% of global trade.

Some experts believe Beijing wants to do just that by trying to reduce its reliance on the dollar protect yourself against the risk of any sanctions with that currency in the future.

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

At the same time, questions have also been raised from Latin America about the primacy of the dollar.

Brazilian President Luiz Inácio Lula da Silva proposed adopting a currency other than the US to finance trade between the BRICS countries (Brazil, Russia, India, China and South Africa).

“Who decided that the dollar should become the currency after gold has disappeared as a parity?” asked Lula during a visit to China in April.

“We need a currency that puts countries in a somewhat calmer situation,” he said, “because nowadays a country has to run after the dollar in order to export.”

But experts say 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 believes an explosion in the use of the yuan in Latin America is unlikely following the announcements from Argentina and Brazil, even though the currency is more prevalent in the region.

“We see a growth in the use (of the yuan) and a real push from China to make it happen,” he says. “But the extent 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.”