China and Brazil agreed to establish a swap line of about $30 billion in their respective currencies as they work to reinforce the clout of the world’s largest emerging markets on a global stage.
China, the world’s second-biggest economy, is promoting the role of the yuan, also known as RMB, in international trading and financing as it moves to reduce its control over the currency and open up its financial markets.
Its agreement with Brazil forms part of the message from BRICS countries, which include Russia, India and South Africa, that existing financial architecture is inappropriate to deal with the world’s main challenges, said Joao Augusto de Castro Neves, an analyst at political risk consultancy Eurasia Group.
“There is economic justification for the swap deal, but there are undeniable political repercussions,” he said by telephone from Washington. “The BRICS have been one of the main items in Brazil’s foreign policy agenda over the past three or four years, so there’s interest in maintaining the BRICS as a relevant forum. This moves the BRICS in that direction.”
The currency swap is worth 190 billion yuan or 60 billion reais, the People’s Bank of China said in a statement on its website today. China is Brazil’s biggest trading partner, with imports and exports between the two countries reaching $75.5 billion last year. China’s central bank said the three-year swap agreement will only be used in case of a credit crisis and could be rolled over after expiration.
“Independently of global financial conditions, with this swap Brazil and China will have the necessary financing to keep our bilateral trade relations as they are today,” Brazil’s central bank President Alexandre Tombini told reporters in Durban. “The idea is not new, but is important. The agreement is another important step in the direction of a deeper integration between central banks.”
The BRICS, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, have called for an overhaul of management of the World Bank (BOWEMBA) and International Monetary Fund to give the rising economic powers a stronger voice. Leaders of the countries are assembled in Durban, South Africa, where they are set to approve creation of a new development bank and discuss the pooling of foreign-currency reserves to mitigate economic crises.
“The swap won’t affect Brazil’s reserves because it’s in local currency,” Tombini said. Nor will it affect current trade financing, he added.
Tombini and Brazil’s Finance Minister Guido Mantega said the agreement has no relation to Europe’s financial crisis because it has been negotiated for eight months. Mantega said the BRICS’ proposed pool of reserves would contain almost $100 billion, and likewise would not affect Brazil’s international reserves.