Brazil Offers Yuan Guarantees to Facilitate Trade with Argentina Amid Dollar Shortage

24 Aug, 2023

Brazil Offers Yuan Guarantees to Facilitate Trade with Argentina Amid Dollar Shortage

Brazil has put forth a proposal to use Chinese yuan guarantees for exports destined for Argentina, aiming to mitigate trade risks associated with its neighboring South American country.

During the BRICS summit, Finance Minister Fernando Haddad shared that these guarantees would be overseen by Banco do Brazil, a state lender. The mechanism involves converting the yuan back into Brazilian reals to settle payments for exporters.

Haddad expressed optimism, stating, "This could greatly benefit Brazilian exporters, and it would be highly positive if Argentina agrees. It would ensure a seamless flow of sales with a 100% guarantee."

This initiative comes as Argentina grapples with a shortage of US dollars, which remains the dominant global trading currency. The Argentine peso has lost its appeal for Brazilian businesses due to its status as one of the poorest-performing currencies globally. Over the past month alone, the peso has depreciated by 20% against the dollar, and its value has plummeted by over 90% over the last five years. Additionally, Argentina is dealing with a triple-digit inflation rate, adding to its economic challenges.

The adoption of yuan guarantees offers a solution to alleviate default risks. The concept has received approval from the Brazilian Treasury but is still pending acceptance from Argentina.

Both Brazil and Argentina have been gravitating toward closer ties with the yuan, aligning with Beijing's ambitions to bolster the internationalization of its currency and reduce the hegemony of the US dollar in global financial matters.

Brazil's central bank has been strategically accumulating Chinese yuan. By the end of 2022, the yuan surpassed the euro to become Brazil's second most prominent reserve currency, trailing only the dollar.

Argentina's commitment to the yuan was evident when, in April, it announced its decision to pay for imports from China using the yuan rather than US dollars. Moreover, Argentina has tapped into a yuan swap agreement to address the shortage of US dollars.