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ECONOMY | 27-04-2023 12:34

Argentina taps China swap line for imports as peso drops

Argentina will finance about US$1.8 billion of Chinese imports between April and May by tapping the swap line that’s worth nearly US$24 billion, Economy Minister Sergio Massa said Wednesday.

Argentina is implementing another emergency measure by tapping a currency swap line with China to finance imports from the world’s second-biggest economy as the peso endures a sell-off. 

Argentina will finance about US$1.8 billion of Chinese imports between April and May by tapping the swap line that’s worth nearly US$24 billion, Economy Minister Sergio Massa said Wednesday. Massa met Wednesday with China’s ambassador to Argentina, Zou Xiaoli, to roll out the announcement.

The measure speaks to the severity of Argentina’s dire economic crisis as a record drought ruins essential commodity exports while inflation over 100 percent wipes out wages and consumer spending. 

Argentina has lost at least US$15 billion of exports due to the worst drought in a century, a key source of dollars often used to help finance imports, Massa said. Argentina’s key soy crop is expected to produce 22.5 million metric tons this year, less than half the production anticipated at the start of planting season. 

The economic havoc has translated into a peso sell-off in parallel markets where it lost about 13 percent of its value just last week. 

Argentina’s planned use of the currency swap is another boost for the yuan’s global use, as the talk for de-dollarisation rises globally. Brazil in March agreed to start settling some trade with China in local currencies and took steps to make it easier to transact with China in yuan. China is Brazil’s biggest trading partner and Argentina’s second-biggest.

Both Argentina and Brazil are seeking to reduce their reliance on the US dollar, with officials earlier this year launching discussions on a common unit of account to bypass the dollar in bilateral trade.

Other countries have also expressed greater interest in using the yuan as China looks to bolster its currency’s global appeal. Iraq is planning to pay for private-sector imports from China in yuan, while Saudi Arabia and United Arab Emirates are also exploring non-oil trade ties using currencies other than the dollar.

In a milestone for the Chinese currency, the use of yuan in China’s cross-border transactions jumped ahead of the greenback’s for the first time in March, according to research by Bloomberg Intelligence citing official data. However, that’s partly boosted by China’s opening up of its capital account and financial markets, and the use of the currency for settlement of trade in goods and services is still much lower.

Created in 2009, the swap between Argentina and China is an agreement between both countries’ central banks, by which the People’s Bank of China has an account in renminbi at the Argentine Central Bank, and the latter has an account in pesos in China.

The swap line will be increased by 35 billion yuan (US$5 billion), Argentina President Alberto Fernández told reporters last year after meeting with Chinese leader Xi Jinping on the sidelines of the G-20 Summit in November.

Although it makes up part of Argentina’s foreign exchange reserves, most analysts don’t count the swap line as part of the government’s liquid cash on hand because it’s so rarely utilised even during volatile periods. 

by Patrick Gillespie, Yujing Liu & Wenjin Lv, Bloomberg

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