Yuan swap deal with Argentina boosts China’s presence in Latin America

The Central Bank of Argentina and the People’s Bank of China signed off an expansion of their currency swap deal on December 2.

The deal increases by 60 billion yuan ($8.7 billion) the existing line between both central banks, first approved in July 2017. The swap line now amounts to 130 billion yuan ($19 billion).

The agreement was reached in the wake of a bilateral summit in Buenos Aires, which aimed to deepen the ties between both economies. The authorities also announced Chinese investments worth $5 billion in sectors ranging from infrastructure and agriculture to mining and energy. 

Apart from boosting China’s growing influence in the region, the deal also contributes to enhancing the international role of the yuan. “As it [the swap deal] is denominated in yuan, it would seem like an effort to boost bilateral trade in yuan at the expense of the US dollar,” Aninda Mitra, senior sovereign analyst at Standish Mellon Asset Management in Singapore, tells Central Banking.

The $8.7 billion extension almost covers Argentina’s annual imports from China. In 2016, China was the second-largest exporter to Argentina after Brazil. Chinese exports to the Latin American economy totalled $10.4 billion, according to trade data provider World Integrated Trade Solution.

That year, Argentina’s trade deficit with China was over $6 billion. This is considerably higher than Argentine exports to China, which stood at $4.4 billion in 2016.

“This is akin to ‘vendor financing’, where China extends credit in yuan to Buenos Aires, which can be drawn upon for continuing to buy Chinese products without worrying about earning or generating dollars to pay for it,” says Mitra. “So the enhancement of the swap line is like a gift which could gradually increase Argentina’s dependency on Chinese products and easy financing.” 

The deal also somewhat takes the pressure off Argentine authorities in relation to the peso’s exchange rate and the economy’s payments imbalances – at least as far as trade with China is concerned, says the analyst.

However, the former chief economist at the Central Bank of Argentina Pablo Andres Neumeyer thinks the swap deal is not primarily related to trade. “This line of credit is very convenient because the central bank needs more reserves, as it has short-term liabilities it needs to pay back,” Neumeyer tells Central Banking. “I interpret this deal more as an additional source of finance to complement the IMF stability package.”

Due to a run on the peso, in May the Argentine government requested the support of the International Monetary Fund to help stabilise the economy. In June, the IMF’s board of directors approved a three-year standby arrangement, giving Argentina access to 35.4 billion in special drawing rights, or approximately $50 billion. And in September it expanded the support to $57.1 billion, the largest programme in the IMF’s history.

Another angle to consider in the deal is the wider use of the yuan in international trade. “I definitely interpret it as a move to boost the yuan’s role as a global currency and also for China to establish itself as a lender of last resort competing with the IMF,” Carlos de Sousa, senior Latin America economist at Oxford Economics, tells Central Banking.

“Although this is not at all a bailout, from a Chinese strategic point of view it goes in the same direction. I think the move should not be seen as completely separate from China’s pledge to invest $5 billion in infrastructure projects in Argentina.”

China’s influence in Latin America has steadily increased in recent years, says Martin Castellano, head of Latin America research at the Institute of International Finance in Washington, DC. As a net importer of raw materials and agricultural products, since the early 2000s China has boosted ties with oil and metals exporters such as Brazil, Peru or Chile.

“While it does not mean much in terms of actual FX market intervention ‘firepower’, the currency swap helps Argentina to show a higher level of external liquidity,” Castellano says. “Boosting foreign reserves is particularly important under the current monetary policy framework as a tool to help stabilise FX market conditions as needed.”

Since late April, the peso has sharply depreciated against the dollar. High budget deficits and dollar-denominated debt increased the vulnerability of the South American economy.

The Central Bank of Argentina tried to defend the peso by selling dollar-denominated assets. However, it failed to stabilise the currency, at great cost to international reserves. In 2018 so far, the peso has fallen by 49.8% against the dollar.

In late September, the Argentine authorities adopted a new monetary policy framework. They implemented a flexible exchange rate, and established a non-intervention zone, an exchange rate band against the dollar of 34–44 pesos. One dollar was worth 37.9 pesos in earlier trading today.