Yuan gains ground in Latin America, but dollar remains dominant

At the beginning of the century, China's trade with Latin America took off, with the search for raw materials for its exponential industrialization; for some years now, Beijing has been pushing its partners to have at least part of this trade in yuan. Various currency swap programs have accelerated the trend, which is also favored by Brazil's political purpose to reduce the international role of the US currency and by the lack of dollars in some countries, particularly Argentina, to make foreign payments. Despite the advance of the yuan in Latin America, however, the dollar maintains its dominant position and is not threatened in the medium term deadline.

The volume of cross-border trade transactions for the purchase and sale of goods carried out with the Chinese currency reached 7.9 trillion yuan (CNY)-1.17 trillion dollars-in 2022, up 37.2% from the previous year, according to the Chinese Ministry of Commerce. Meanwhile, data of the SWIFT interbank system also shows a growing global use of the Chinese currency, which last September reached a record share of 3.71% in international settlements.

This advance in the weight of the Chinese currency does not constitute, at least for the time being, a particular threat to the position of the dollar, whose role continues to be dominant. In terms of foreign currency reserves accumulated by countries, 58.88% is still in dollars and only 2.45% in yuan, a figure that is below that of another non-traditional currency in the reservation basket, such as the Canadian dollar. In the SWIFT system, the dollar is used in 46.6% of payments and the yuan ranks fifth, with the aforementioned 3.71%, behind the euro, the pound sterling and the Japanese yen. In commercial transactions, the dollar has a share of 88.5%, the euro 30.5% and the yuan, also in fifth place, 7%.

In any case, the yuan is making progress in international markets and China's exchanges with the Latin American continent have not been alien to this growth. Moreover, certain attempts to distance themselves from the United States have led some leaders, such as Brazil's President Luiz Inácio Lula da Silva, to act as a loudspeaker in the Global South for the political desire to reduce the weight of the U.S. dollar in the world.

Brazil has China as its main commercial partner , with a volume of exchange of goods that in 2022 surpassed the record of 150.5 billion dollars. Beijing's effort to extend the use of its currency in its commercial operations has increased the level of reserves that the Central Bank of Brazil has in yuan, so that reserves in this currency have reached 5.3%, when in 2018 they did not exist, and have surpassed those accumulated in euros. However, reserves in dollars hover around 80%; that same percentage is the total trade that Brazil conducts in the US currency.

If the Brazilian authorities have signed several 'swap' agreements with Chinese currency, the Argentine case is more striking, since part of these currencies have been destined, no longer to buy Chinese goods, but to cover maturities of the IMF's 2018 credit in view of the lack of dollars from the Central Bank of Argentina. A agreementbetween the central banks of both countries, extended in November 2022 and again in April and June 2023 in view of Argentina's financial deterioration due to high inflation, increases the 'swap' with China to an amount of 130 billion yuan (about 18.2 billion dollars) for the three-year deadline . This allowed, for example, Argentine companies to make import payments with the Chinese currency, which in April and May of this year alone amounted to around 1.8 billion dollars. This agreement allows the South American country to have 10,000 million dollars at its disposal as a free reservation availability , such as the funds already earmarked for two IMF payments. The extension of the swap increased the share of the Chinese currency in the international reserves of the Argentine Central Bank to 48%.

In Bolivia, where international reserves have also been reduced and there is a shortage of dollars, the president, Luis Arce, referred to the desire to use yuans in foreign trade operations, although domestic transactions with China are smaller than those of its two large neighbors. "The two largest economies in the region are already trading in yuan in agreements with China", said Arce, who believes that "the trend in the region is going to be like that".

Like Brazil and Argentina, Chile already signed in the last decade a agreement of exchange of foreign exchange with China, which in 2021 was renewed for another five years and amounts to an equivalent of 7.7 billion dollars. Chile was where Latin America's first yuan clearing bank was opened in order to encourage trade between the two nations.

Ecuador and Uruguay could continue on this path, as they are negotiating free trade agreements with China, leading to the adoption of 'swaps' agreements and future exchanges in yuan (the negotiation opened by Uruguay, however, must be accepted and accompanied by the rest of Mercosur members, something so far disputed).

Politics of Brazil and Argentina

The modest but appreciable advance of the yuan in Latin America is influenced by China's diplomatic offensive to translate its high level of trade with the region into greater international use of its currency. But there are also motivations specific to Latin American countries, such as suspicion of the historical hegemony of the United States and the lack of dollars in some countries.

In his return to power in Brazil, Lula has taken a combative stance against the preponderance of the United States, and has specifically questioned the primacy of the dollar as the universal transaction currency. "Every night I ask myself why all countries are obliged to do their trade glued to the dollar," he said in April in an official visit to Beijing. Lula has proposed abandoning the U.S. currency in trade between Brazil and Argentina, or between Unasur and BRICS countries, replacing the dollar with a bilateral or multilateral unit of account.

The initiative that Brazil and Argentina have been talking about -a sort of monetary union, applied in principle only to commercial transactions, without abolishing the national currencies in the respective countries- has at its core a purpose of de-dollarization. It could make economic sense only if fundamental conditions were met, which are not, in macroeconomic, legal and political aspects. Therefore, Washington would not have much to worry about with respect to the "South" currency (the name decided upon for this supposed currency). Nor does the BRICS currency project The BRICS currency system, which could be implemented in two ways: either by creating a common central bank to manage the new accounting unit, or by using a currency of one of the members - in that case it would be the Chinese currency - as the currency for the exchange trade.

As far as Argentina is concerned, there is also a desire to move away from the U.S. currency. There are many reasons to explain this phenomenon, the first stems from Argentina's enormous dependence on the dollar. Public debt reached 403,809 million dollars in the middle of this year and foreign currency amounts represent 64% of that total.

In Argentina, the dollar is a very familiar element in the local Economics ; houses, land and Departments are bought and sold, and there are even convenience stores that, due to the volatility of the exchange rate subject , compute their prices in this currency. The dollar is so important that those who have the facility to save, do so by acquiring this currency and companies, even if they do not have exercises outside the country, dollarize their savings. In the country, the dollar has a symbolic value that is not seen in any other country in the world [1].

But this demand for monetary sovereignty is not shared by the entire population. There is the proposal dollarization of Argentina made by the presidential candidate Javier Milei, although this also has to do with the desire to take the government's hands off the School of printing banknotes to feed electoral clientelism, which generates corruption and inflation. In any case, the growing resource to the yuan by the last Argentine government has been mainly due to the lack of available dollars.

Reaction from the United States

The United States is aware of the yuan's gaining ground and is analyzing how it can react to preserve its advantage in the continent, where, on the other hand, three other countries have been using the dollar as their official currency for some time (Panama, El Salvador and Ecuador). Ideas such as renegotiations of free trade agreements, market opening clauses and investment proposals are frustrated by the innovation and flexibility of Chinese treaties, which are optimized and better adapted to the needs of its partners.

One attempt by the Biden administration to respond to this is the Alliance of the Americas Partnership for Economic Prosperity (APEP), agreed to during last year's Summit of the Americas in Los Angeles. That Partnership offers the 11 members improvements in digital trade, supply chain security, the establishment of more flexible customs rules, and the generation of jobs in the area clean energy sector. Although it is true that its reception by regional leaders was not as expected, right now it is the most feasible political tool of the United States to promote trade and continue with the dollar as the most advantageous currency.