May 20 (Bloomberg) -- China and Brazil’s plans to conduct bilateral trade in yuan and reais will be limited because the Chinese currency is still not fully convertible, Bank of China Ltd. said.

The two nations are researching the plan, Celso Amorim, Brazil’s foreign minister, said at a briefing in Beijing yesterday. China is seeking to promote the yuan as an international currency after signing 650 billion yuan ($95 billion) in swap agreements with Argentina, Indonesia, South Korea, Hong Kong, Malaysia and Belarus in recent months.

“It may take a couple of years for China and Brazil to really start using yuan in trade because the currency is of limited use outside China,” said Shi Lei, an analyst in Beijing at the nation’s largest foreign-currency trader. “We should first start yuan settlements with Hong Kong and build an offshore yuan center to expand channels for yuan use.”

China’s State Council said on April 8 that it will allow Shanghai and four cities in the southern Guangdong province to settle international trade in yuan. The Chinese currency has gained 21 percent against the U.S. currency since a dollar peg was abolished in 2005, eroding the value of exporters’ dollar- denominated profits.

Liu Tienan, vice chairman of China’s National Development and Reform Commission, said in April that it’s hard to set a timeframe for the currency’s move toward convertibility,

“China is working toward making its currency convertible, but it is not there yet,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, in a note yesterday. “There are several considerations that go into making a currency an attractive invoicing unit, and official desires do not rank that high.”

U.S. Treasuries

China and Brazil’s proposal to settle trade in local currencies signaled that developing nations are seeking to reduce their reliance on the U.S. dollar, according to Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.

Chinese investors hold $768 billion of Treasuries and the government has expressed concern that U.S. government spending to counter the recession will weaken the greenback. The growing role of the so-called BRIC economies of Brazil, Russia, India and China in global trade has given extra weight to their views, Kowalczyk said.

“Russia has been very vocal about moving away from the current dollar-dominated world financial system, Brazil is not very U.S.-friendly either, and China has been talking about the dollar being replaced,” he said. “The idea has a lot of momentum.”

State Visit

President Luiz Inacio Lula da Silva is on a three-day state visit to China, accompanied by 240 business leaders including Petroleo Brasileiro SA Chief Executive Officer Jose Sergio Gabrielli.

Brazil and Argentina, the two biggest South American economies, agreed to trade in local currencies, dropping the dollar, in September. The move was an attempt to reduce transaction costs by eliminating fees on currency exchange.

Last month, the two South American nations traded $22.6 million in local currency of the more than $1.6 billion trade flow, according to figures by the Brazilian central bank and Trade Ministry.

“If with Argentina, a neighbor with whom we have long relations, trade in local currency didn’t develop as wished, what should we say about the Chinese proposal,” said Jose Augusto de Castro, vice-president of Brazilian Foreign Trade Association, a research group funded by Brazil’s biggest exporters. “If I’m paid in yuan, what will I do? Convert to dollars and pay banks an expensive fee for the exchange? No businessmen would accept that.”

To contact the reporter on this story: Dune Lawrence in Beijing at dlawrence6@bloomberg.net; Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net

Last Updated: May 19, 2009 22:02 EDT