By SERGIO HELD in Bogota, Colombia | China Daily Global | Updated: 2023-08-22 09:18
Argentina, which is working to address the economic and currency crisis, is once again looking to China. In the process, it is helping give the yuan more international clout, experts note.
Argentina is increasingly relying on the Chinese yuan not only to clear external debt but also for financial instruments and the trade of goods and services, according to analysts.
There is a possibility for Argentine capital market participants to jointly operate different financial instruments denominated in renminbi, the Argentine government said, following an announcement allowing the trade of yuan securities and setting the conditions to clear and settle portfolios using the yuan.
Earlier, facing a $2.7 billion payment to the International Monetary Fund this month, Argentina reached an agreement on Aug 4 with a Chinese bank, which would pay the equivalent of $1.7 billion in yuan directly to the IMF. The rest would come from a bridge loan provided by the Development Bank of Latin America.
„In this way, we are protecting the reserves in a year in which the problem represented by the debt with the Fund was compounded by the worst drought in history,“ Economy Minister Sergio Massa told the media.
The agreement with the People’s Bank of China fell under an existing currency swap agreement. This type of swap is more often used to finance trade and direct investment.
„The yuan has a higher status than it had before, but for the IMF to accept a payment in yuan is also like accepting or giving more relevance to the yuan,“ said Miguel Boggiano, CEO of Carta Financiera, a web portal that tracks Argentina’s economy.
Argentina and China first reached a 70 billion yuan ($10.3 billion) currency swap agreement in 2009 and expanded it in 2018 to 130 billion yuan. Part of the agreement allowed Argentina to access as much as 35 billion yuan of the swap line freely.
Argentina activated this portion in January as it was trying to tackle a worsening currency crisis. In April, Argentina said it would start paying for Chinese imports using yuan. In June, the swap agreement was extended for three more years, while the freely accessible portion expanded to 70 billion yuan.
Argentina’s economic and financial crisis has not abated, but China’s support has helped the country to avoid another default on its international debt. In 2001, the nation defaulted on $93 billion in external debt.
An extended drought has made Argentina’s economic situation worse. The drought has cost some $20 billion in lost exports, according to Massa.
Argentina froze exports of beef for the second half of August, a move that is likely to cause more pain. The action was in response to a sudden plunge in its currency and stock markets after a surprise victory in primary elections, on Aug 13, of Javier Milei, a far-right candidate who has vowed to eliminate the Argentine central bank, replace the peso with the US dollar and privatize state companies, if elected.
The primary is seen as an indicator of the likely outcome of the presidential elections scheduled for Oct 22.
Analysts say that trust between China and Argentina has been built during several different Argentine administrations.
„Institutional trust between the two countries has been built over the last few administrations. It is not something new,“ Cristian Inderkumer, director of research of the Civil Association for Argentine-Chinese Cooperation, told China Daily.
There had been concerns that the IMF would reject payment in yuan, but the direct payment made by China on behalf of Argentina and remarks by the IMF suggest that the use of the yuan to handle international debt could become increasingly common.
„With respect to the payments in renminbi, our general practice is not to comment on the specific transactions of a member country,“ Julie Kozack, the IMF’s director of communications, said on July 13.
„As we have stated in the past, the Argentine authorities continue to remain current on their financial obligations to the IMF. The renminbi is one of the five freely usable currencies that members can and have used to settle their obligations with the IMF,“ Kozack said.
During a recent trip to Beijing, Massa met with Chinese officials and discussed, among other things, enhanced currency cooperation.
„China is one of Argentina’s main trading partners and this currency cooperation is an important tool to combat Argentina’s foreign currency shortage,“ said Inderkumer.
The writer is a freelance journalist for China Daily.