Brazil and China Strike Currency Swap Deal

Brazil has provided a vote of confidence in China’s efforts to promote the renminbi as a reserve currency by becoming the biggest economy yet to agree a swap deal with Beijing.

Brazil and China announced the 60bn reais or 190bn yuan (US$30bn) local currency swap after a bilateral meeting between Wen Jiabao， the Chinese premier， and Dilma Rousseff， Brazil’s president， on the sidelines of the Rio+20 environmental summit in Rio de Janeiro.

The two nations signed the deal on June 21 in a bid to safeguard against any global financial crisis and strengthen their trade ties. It will allow their respective central banks to exchange local currencies worth up to $30bn. The amount can be used to shore up reserves in times of crisis or put towards boosting bilateral trade.

“As international credit remains scarce， we will have enough credit for our transactions，” Brazil’s Finance Minister， Guido Mantega， said. “It is a measure that reinforces the economies of both countries.”

A global yuan

The agreement is the latest in a series of similar deals signed by China with its trading partners.

In March this year， it signed a swap deal with Australia worth up to A$30bn ($31bn) to promote bi-lateral trade and investment.

China has signed about 20 such agreements over the past four years with countries ranging from Argentina to Japan and the United Arab Emirates.

Analysts said that Beijing has been trying to push for trade to be settled in yuan， rather than in US dollars， as part of its plans to seek a more global role for its currency.

“The motivation is to be less reliant on the US dollar，”said Sean Callow， chief currency strategist at Westpac， as reported by BBC. “We will see firms in the two countries settle their accounts in local currencies.”

Mr. Callow added that with an increasing number of economies signing such agreements with China， its plans for a more global role for the yuan had received a major boost. It is a big positive for China on that account.

At the Group of 20 meeting in Los Cabos， Mexico， the so-called Brics nations， which aside from Brazil and China also include India and Russia， discussed establishing more local currency swap agreements among themselves. The deal between China and Brazil was the first bilateral swap announced since those discussions.

Closer cooperation

The agreement comes amid efforts by Brazil and China to deepen their economic partnership， with Braspilia concerned that while it was exporting mostly unprocessed commodities to Asia， it was facing a growing flood of cheap， mostly Chinese， manufactured imports from the region， according to Financial Times report.

In a hint at their bilateral tensions， the two leaders underlined the importance of increasing the value-added component of their exports to each other.

Brazil has taken several measures to curb cheap imports， particularly by taxing overseas goods， such as cars and motorbikes， more heavily than domestically produced items.

“The leaders underlined the importance that bilateral investment flows contribute to the aggregation of value in the production chains of the recipient country，” Brazil said. “They reiterated their promise to resolve trade questions through consultation and friendly dialogue through established institutional channels and condemned any recourse to trade protectionist measures.”

It said China had agreed to allow the local assembly of Brazilian Embraer jets in a sign that a long-running dispute over Beijing’s barring of the aircraft was nearing a resolution. It also said that the Brazilian bus maker Marco Polo was nearing a conclusion of a proposed vehicle joint venture with Chinese producer SG Automotive Group.

Mr Mantega said Brazil and China had agreed to elevate their relationship to the level of a “global strategic partnership” and announced a “10-year plan of co-operation”covering areas from education to space technology that will take effect between 2012 and 2021.

Among the education agreements， China will grant scholarships to 200 Brazilian students a year and the two countries will promote the instruction of their languages in each other’s universities.

They will also open cultural centres and will launch a“Brazil month” and “China month” in each other’s countries starting in 2013.