To be sure, this is not the first swap of its kind. So far, China has entered into 6 BILATERAL deals w/other nations since late 2008. Most of these deals have been w/other Asian nations and remain focused on trade finance. In other words, the currency conversion would be basically useless outside the relatively narrow realm of specific trade terms and factors. But this is an important step in establishing China's growing geopolitical role outside of the G-8 political and economic dominance.
Why Argentina though? First some background.
Well, Argentina has long been the pariah state of international economics. Buenos Aires defaulted on its international debt at the beginning of the decade and sparked a series of rather violent political changes. To this day international relations remain strained between Western creditors (bondholders) and the Argentine market.
Into the breach stepped China, whose government has shown a remarkable ability to do business w/any kind of government - tinpot dictatorships (N Korea), genocidal generals (Burma and various Central African despots), recovering Communists (Russia), and democratically socialist (USA). Back in early 2008 and all of 2007, the focus was on China's expansion into Africa in a search for commodities.
So, what does Argentina have to offer besides tango music and some very well dressed people?
Agriculture. Argentina is one of the largest exporters of beef and grain (including soybeans) in the world. China's population of 1.3 billion people and growing still need to be fed. And China's leaders have done a fine job of devastating their environment through intensive pollution. It is a sad but true fact that China now has to import more rice and wheat than it grows domestically.
DJ HEARD ON THE STREET: Towards Swapping China's Currency
By Andrew Peaple A DOW JONES COLUMN
When it comes to getting the world to stop thinking just in dollar terms, Beijing's trying to do more than just talk the talk.
It'll be a while before the U.S. Treasury needs to be concerned, though.
Since December, China's central bank has signed bilateral currency swap agreements with six different countries, worth $650 billion in total.
Lately, those deals have gone beyond the country's Asian neighbors to include Belarus this month and Argentina this week. Talks are underway with other countries as well.
The aim here is to lay a foundation for the yuan to become more widely used in global trade.
The idea behind the swaps themselves is to provide central banks with yuan to inject into their own financial systems. Firms importing goods from China can then pay for them with yuan borrowed from domestic banks. This also reduces Chinese firms' transaction costs.
Great in theory. But China has more to do to make these swaps practically useful, rather than just political gestures of goodwill.
Chinese exporters can't invoice in yuan today. Rather, they still have to be paid in dollars, mostly, or some other currency.
This will all take time. Meanwhile, most of the countries that have entered swap agreements with China haven't utilized them yet. The yuan they receive has little use to them outside of trade finance anyway, because it can't be traded outside China. So a country like Argentina, say, couldn't sell the Chinese currency to defend its own currency, a normal use for a country's foreign exchange reserves, although the swaps could free up dollars for that purpose.
The Chinese are nothing if not patient. But this is one project that's going to take some time to bear fruit.
(Andrew Peaple, a Columnist on Dow Jones' Heard on the Street team, has been a financial journalist since 2003. Currently based in Beijing he has also covered the U.K. economy and financial services, and is a U.K.-qualified chartered accountant. He can be reached on +86-10-6588-5848, or by email on firstname.lastname@example.org)
(END) Dow Jones Newswires