March 26, 2013 5:12 pm

Brazil and China agree currency swap

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Soybeans Brazil©Bloomberg

Brazil and China sealed a $30bn currency swap agreement on Tuesday that is expected to act as a backstop to growing trade between the two countries.

Though the agreement is expected to be of little use in day-to-day trade, the deal will guarantee the flow of Brazil’s growing soy, iron ore and other exports to China and China’s imports of manufactured goods to Brazil regardless of global financial conditions.

“The purpose of this swap is that, independent of the conditions prevailing in the international financial market, we will have $30bn available which would represent eight months of exports from Brazil to China and 10 months of imports to Brazil from China,” said Alexandre Tombini, president of Brazil’s central bank in a press conference on the sidelines of the Brics summit in South Africa. “This is sufficiently large to guarantee normal trade operations.”

The currency swap agreement, worth R$60bn in Brazilian currency, was first announced by Brazilian president Dilma Rousseff and former Chinese premier Wen Jiabao on the sidelines of the Rio+20 environmental summit last year.

The move is seen as an important step forward in China’s “currency swap diplomacy” – its efforts to promote the renminbi as a global reserve currency amid a number of other such agreements with countries ranging from Australia to Argentina. Brazil represents an attractive prospect for Beijing’s efforts to grow trade in renminbi. Its large domestic consumer market and need for infrastructure make it an ideal export destination for Chinese goods.

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“China has a lot of trade interest in Latin America’s raw materials but more interesting from China’s perspective is access to the region’s large consumer market and beyond that, financing of infrastructure,” said Flavia Cattan-Naslausky, director of Latin American foreign exchange strategy at RBS.

Mr Tombini did not disclose the details of the mechanism but said the central banks of China and Brazil would deposit the money with each other in their respective currencies for a period of three years, with the possibility of extension upon expiry.

The central banks would be responsible for extending lines of credit to support companies trading.

But Mr Tombini and Brazilian finance minister Guido Mantega stressed that there already existed sufficient credit mechanisms for trade in the market and the swap would be there more for emergencies. “This will enable trade to continue if there is any tightening of credit conditions in a financial crisis,” Mr Mantega said.

He said the swap was similar to that announced by the US Federal Reserve with 15 countries, including Brazil, during the global financial crisis.

Currency experts said in practice the swap would have little effect on foreign exchange markets because Brazil and China already had ample foreign reserves.

In addition, both the renminbi and the Brazilian real are subject to capital controls, making it difficult for exporters to use them on a daily basis. Brazil’s major exports are also commodities, which are priced in dollars, adding further complexity to any attempt to exclude the greenback from trade between the two countries.

“It’s important from a diplomatic point of view, a geopolitical point of view on how the Brics try to tie themselves together and try to create something that’s material. However, in terms of the day to day impact, I think it’s negligible,” Nick Chamie of RBC Capital Markets said of the agreement.

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