Agreements could increase the use of the renminbi in Brazil-China trade

By Assis Moreira

Using the Chinese currency renminbi may soon expand transactions between Brazil and China and fuel plans to reduce the dollar’s hegemony gradually.

And this comes with two moves.

First, the People’s Bank of China, the Chinese Central Bank, announced last week the signing of a memorandum of understanding (MOU) with the Central Bank of Brazil (BCB) on establishing renminbi clearing arrangements in Brazil.

In a four-line note, the Chinese monetary authority stressed that the agreements would help companies and financial institutions in the two countries conduct cross-border transactions using the Chinese currency and further facilitate bilateral trade and investment.

China already has an arrangement with more than 25 countries to settle payments in renminbi with direct access to domestic (China National Advanced Payment System, CNAPS) and international (Cross-Border Interbank Payment Systema, Cips) payment systems.

The Brazilian Central Bank informed the column that the memorandum would accommodate a prerequisite, under Chinese regulations, for the Chinese monetary authority itself to choose, at its discretion and privately, without the participation of the BCB, an institution authorized to operate in foreign exchange in Brazil to act as an ‘Offshore Clearing Bank’ in the country.

According to the Brazilian Central Bank, the “eventual implementation” of the arrangement in the country, including the possibility of new entrants under the same framework, has the potential to bring the following benefits to the business models that use the renminbi in Brazil:

• increased local liquidity of the Chinese currency;
• maintenance of foreign exchange reserves in hard currency in the country;
• reduction of intermediaries in international payments;
• and approximation of the Brazilian payment system to the Chinese one, with increased operational efficiency in terms of cost and time reduction.

The Central Bank informs that, after negotiations, the proposal was forwarded by the People’s Bank of China.

The Central Bank agreed with its terms since it is subject to the prevalence of the countries’ internal legislation, such as the Foreign Exchange Law.

“I think China will put more pressure on the use of the renminbi in bilateral trade,” predicts Marcos Caramuru, Brazil’s former ambassador to China (2016-2018), partner at the Kemu consultancy, and one of Brazil’s leading China experts.

“The goals are less use of the dollar and more predictability for those in trade, who get rid of currency fluctuations.”

Alexandre Lowenkron, CEO of the Bocom BBM bank, notes that the Chinese, as the largest buyers, can decide in which currency to pay, which will result in an acceleration of the renminbi in bilateral trade.

The second move will come precisely with Bocom BBM becoming, in March, during President Luiz Inácio Lula da Silva’s visit to Beijing, the first Latin American institution to be a full member of Cips, the Cross-Border Interbank Payment System that China launched in 2015 to internationalize the use of the renminbi and rival Swift, the US-controlled system.

Cips went live after Russia was hit with international sanctions over its invasion of Crimea the previous year.

Compared to Swift, this system still has small but expanding coverage.

In November 2022, the Renminbi retained its position as the fifth most active currency for payments by value globally, with a share of 2.37%.

Regarding international payments, excluding euro zone transactions, the Chinese currency ranks sixth globally, with a share of 1.63%.

In Brazil-China trade, bilateral transactions essentially use the dollar as an intermediary instrument for conversion between the two national currencies.

A third currency in the transactions raises costs and adds a source of currency risk.

Lowenkron says that the interest of companies in using the Chinese currency has increased a lot even before the bank joined Cips for closing foreign exchange, issuing letters of credit to finance exports, hedging, and investing of Chinese companies.

The executive sees more opportunities to access overnight financing besides cheapening and speeding up transactions with Brazil’s largest trade partner.

The expectation in financial circles is that the renminbi should gain traction this year as the Chinese Central Bank implements the government’s strategy for using the currency abroad to challenge the dominance of the US dollar in the long term.

Its use for payment of exports and imports has already increased in Russia and Southeast Asia.

In Latin America, Argentina late last year also made an agreement with China to help bilateral transactions occur without going through a third currency.

For Ken DeWoskin, a China specialist at Deloitte consultancy, the memorandum of understanding between China and Brazil could theoretically add efficiency to trade and investment transactions.

But he says it is important to see whether central banks are willing to take on the renminbi as a reserve currency and whether mechanisms are in place for various trade and investment counterparties to use the Chinese currency.

In Brazil, in 2018, the Chinese currency had zero shares of international reserves and rose to 5% in 2021, Alexandre notes.

‘China’s goal is to be able to use its renminbi to buy Brazilian commodities rather than its US dollar reserves,’ he says.

One question is whether Brazilian commodity exporters like Vale would rather take renminbi and exchange it for reais under this agreement or receive it in dollars that they can use anywhere for trade and investment.

Also, the fact that the exchange value of the renminbi is set administratively by the PBoC, the Chinese Central Bank, and not by the markets will stabilize or distort the value of currencies.

DeWoskin doubts whether the agreement will add efficiency or, in fact, new risks to commodity purchase contracts denominated in the Chinese currency.

In the view of Cassio Von Gal, executive vice president of Bocom BBM, once the two instruments – the agreements between the CBs and Cips – are in operation, there will be interest among the large Brazilian exporters of cellulose, minerals, and proteins in using the Chinese currency.

He thinks that one question is whether or not the large grain and fuel export trading companies, for example, will adhere.

The internationalization of the Chinese currency is gradual but inevitable.

International transactions are still paid more than 76% in US dollars and euros.

However, the renminbi’s share has increased and is now the fifth most traded currency globally, surpassing the Japanese yen and the Swiss franc.

China is the world’s largest trading nation, but its Renminbi transactions are timid, standing at between 15% and 20% of its total trade volume – meaning there is plenty of room for growth.

With information from Valor Econômico