Bolder yuan seen for LatAm

China Daily (USA) - - ACROSS AMERICAS - By MAO PENGFEI and PAU RAMIREZ in Mex­ico City for China Daily

Now that the yuan is in­cluded in a key cur­rency group­ing, its glob­al­iza­tion can be a boon to Latin Amer­ica by en­abling ex­panded credit op­tions for eas­ier trade with China, ac­cord­ing to Latin Amer­i­can an­a­lysts.

The in­clu­sion of the Chi­nese yuan, or ren­minbi (RMB), in the In­ter­na­tional Mone­tary Fund’s (IMF) Spe­cial Draw­ing Rights (SDR) cur­rency bas­ket as of Oct 1 is a cru­cial step for it to be­come a global cur­rency.

The yuan has taken its place along­side the world’s four other ma­jor re­serve cur­ren­cies: the dol­lar, euro, Bri­tish pound and Ja­panese yen. The yuan is the only cur­rency from a de­vel­op­ing nation in the SDR.

Jorge Cas­tro, pres­i­dent of the In­sti­tute of Strate­gic Plan­ning (IPE) in Buenos Aires, said that the yuan’s new place will help to cre­ate a more mul­ti­po­lar eco­nomic or­der.

“The per­ma­nent in­clu­sion of the yuan in the IMF’s bas­ket of cur­ren­cies is a step of ex­tra­or­di­nary im­por­tance for the yuan’s con­ver­sion into a global cur­rency,” he said. “This ac­cel­er­ates its process of in­ter­na­tion­al­iza­tion, and all signs in­di­cate it will be­come a global cur­rency in the next five or six years,” he ex­plained.

“Trad­ing in our times is headed up by China, which will ac­com­pany the grow­ing use of the yuan in in­ter­na­tional trade, along­side other in­ter­na­tional cur­ren­cies,” con­tin­ued Cas­tro.

“In 1990, the US GDP was around 22 per­cent of the global to­tal; this is now un­der 15 per­cent. China has be­come the sec­ond-largest global econ­omy ... mak­ing the two cru­cial global cur­ren­cies the US dol­lar on one side and the Chi­nese yuan on the other,” said the ex­pert.

Cas­tro was keen to point out that the IMF’s de­ci­sion will im­pact Ar­gentina as “China is Ar­gentina’s main for­eign in­vestor. Fur­ther­more, China ac­counts for over two-thirds of the coun­try’s agri­cul­tural ex­ports.”

With the yuan now serv­ing as a global cur­rency ac­cepted in in­ter­na­tional transactions, Latin Amer­ica’s trade ties with China can ben­e­fit from in­creased lines of fi­nanc­ing, es­pe­cially for de­vel­op­ing coun­tries with lit­tle ac­cess to in­ter­na­tional credit mar­kets.

While Bei­jing con­sid­ers the yuan’s rise to re­serve sta­tus as “recog­ni­tion of China’s eco­nomic de­vel­op­ment, re­forms and open­ing up”, for Latin Amer­ica it stands to have a pos­i­tive im­pact on trade.

The move bol­sters Latin Amer­i­can cen­tral banks’ beef­ing up their for­eign re­serves with yuan and trans­forms them into ac­ces­si­ble sources of fi­nanc­ing for com­pa­nies that want to do business with China.

In Septem­ber, the yuan was the world’s fifth most used cur­rency for global pay­ments (after the dol­lar, euro, pound and yen), ac­cord­ing to the global trans­ac­tion ser­vice SWIFT.

De­spite be­ing a re­gion with sub­stan­tial trade flows with China, Latin Amer­ica still car­ries out few transactions in yuan, though sev­eral re­gional coun­tries have said they in­tend to de-em­pha­size the dol­lar,

in­clud­ing Brazil, a mem­ber of the BRICS bloc of emerg­ing economies, along with Rus­sia, In­dia, China and South Africa.

“BRICS mem­bers want to step up trade in na­tional cur­ren­cies to cut back their re­liance on the United States, and that can lower costs. If the yuan is avail­able to Brazil­ian ex­porters, it would be an ad­van­tage,” said Alexan­dre Con­tijo, an an­a­lyst at the Brazil-China Business Coun­cil.

In ad­di­tion to the yuan’s ad­mis­sion into the ex­clu­sive club of re­serve cur­ren­cies, China launched the Cross­bor­der In­ter-bank Pay­ment Sys­tem (CIPS) in Oc­to­ber 2015, and the two mea­sures to­gether will likely in­crease the use of the yuan in Latin Amer­ica’s trade flows.

Brazil­ian an­a­lyst Larissa Wach­holz, of con­sult­ing firm Vallya, said the CIPS, backed by the yuan’s new re­serve cur­rency sta­tus, can serve to pro­mote the use of the ren­minbi in in­vest­ment fi­nanc­ing.

“There is a move­ment in China to move things in that di­rec­tion. Chi­nese banks have con­sol­i­dated their pres­ence in Latin Amer­ica. En­ti­ties such as the ICBC (In­dus­trial and Com­mer­cial Bank of China) or the China De­vel­op­ment Bank have the ca­pac­ity to fi­nance Chi­nese in­vest­ment in Latin Amer­ica, and now, if they are in­ter­ested, they can do it in yuan. Though it re­mains to be seen how th­ese banks are go­ing to im­ple­ment that,” Wachlolz said.

The new flow of yuan could have the “most im­me­di­ate” im­pact on coun­tries such as Venezuela, which are un­der­go­ing eco­nomic hard­ship but have lit­tle ac­cess to in­ter­na­tional credit mar­kets, she said.

The South Amer­i­can coun­try could ben­e­fit from Chi­nese fi­nanc­ing in yuan, which it could then use to pay for im­ports from that coun­try, said Wach­holz.

On Tues­day, Venezue­lan Pres­i­dent Ni­co­las Maduro said talks with China to that ef­fect were “ad­vanc­ing”.

The ef­fect of the yuan’s new sta­tus in other ar­eas re­mains un­cer­tain, Wach­holz said.

To pro­mote the use of an “IMF money” sys­tem and boost the yuan in the process, China’s gov­ern­ment on Sept 1 is­sued an SDR-de­nom­i­nated bond in its in­ter­bank mar­ket.

SDR was cre­ated by the IMF in the 1960s as a “sup­ple­men­tary in­ter­na­tional re­serve as­set”, whose value is to­day based on the five re­serve cur­ren­cies. SDR bonds have been tried be­fore, in the 1980s, with lit­tle suc­cess.

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