The talk to replace the U.S. Dollar as the Global Reserve Currency is becoming a shout backed with Financial muscle!
CHINA and Argentina have agreed to swap $14.5 billion of their currencies to enable South America’s second-largest economy to avoid using US dollars in trade between the nations, as Beijing ratchets up the pressure on Washington.
In a bid to force the US to relax its grip on global financial institutions, China yesterday announced a deal allowing Argentine businesses to buy Chinese imports directly in yuan. Usually, international trade is conducted in US dollars, which Argentine companies have to buy with pesos.
The currency swap with Argentina is the first between China and a Latin American, but follows similar deals to bypass the dollar recently concluded by Beijing with South Korea, Indonesia and Malaysia – driving growing expectation that Asia will steadily be transformed into a “yuan bloc”.
China has been pushing to end the dollar’s international dominance as a currency.
The move comes as the Group of 20 leaders, including China’s President Hu Jintao and US President Barack Obama, will discuss reforming the international financial system at the G20 meeting in London tomorrow.
The US holds 17 per cent of the voting power within the International Monetary Fund, which, as China’s state news agency Xinhua commented yesterday, “is big enough to veto” any major proposal within the organisation.
Royal Bank of Scotland economist Ben Simpfendorfer said a “de facto adoption of the yuan as an Asian currency unit” may be on the cards, with China becoming the major trading partner of most other Asian countries.
The move aims to help Argentina by cutting trading costs, giving it access to hard currency and strengthening its financial position as it is battered by the global financial crisis.
Argentina’s chief imports from China include electronics, computers and chemicals, and its main exports are rural commodities such as wheat and soy beans.
China joined the Inter-American Development Bank in January, and Zhou Xiaochuan, the governor of the People’s Bank of China, has been attending the annual meeting of the IDB in Medellin, Colombia, this week.
He said China was ready to join other IDB members to promote sustainable economic and social development in the region.
Mr Zhou said the IDB had become “the most important platform” for China’s collaboration with Latin America.
In response, Argentina’s central bank governor, Martin Redrado, said his country backed China’s discussion of replacing the US dollar as the global reserve currency, with a broader based alternative. Mr Zhou suggested the special drawing rights of the IMF that comprise a basket of the yen, euro and pound sterling as well as the US dollar.
Venezuela’s Finance Minister, Ali Rodriguez, also backed the creation of a new currency structure for international settlements.
Concerns are growing, especially in China, the biggest international holder of US dollars, that the US may finance its huge stimulus packages by printing more money, triggering a fall in the dollar and of the currency’s denominated assets in general.
Shanghai municipal government recently issued guidelines urging businesses to “do a good job in experimenting using RMB (yuan) in international trade”.
Wang Qishan, a vice-premier and China’s finance industry chief, urged in an article in London’s The Times “the reform of the international financial system, with the focus on readjusting the governance structure of international financial institutions and increasing the representation and voice of developing countries”.
He said that IMF quotas should be increased – a likely topic at the G20 meeting – but “if such contributions fall short of immediate needs, the IMF can issue bonds, and China will be a buyer of the bonds”.
The Asian Development Bank yesterday cut to 6.5 per cent its forecast for China’s economic growth this year. The World Bank earlier reduced its own forecast to 7 per cent. China grew 9 per cent last year.
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