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Last Updated:[21-05-2009 09:03:35 EDT] Zoom in Zoom out Back to Tradenews

During China Visit the Brazilian Prez Reiterates the Need to Depart from USD

tradenews President of Brazil, Luiz Inacio Lula da Silva in his visit to China reiterated that both countries should work towards integrating respective currencies in their bilateral trade and thereby reduce transaction costs by eliminating the charges on currency exchange. Even during last month’s G20 summit in London, Lula had drawn attention to this need to his counterpart Hu Jintao following China's central bank governor Zhou Xiaochuan suggested dumping the dollar as the global reserve currency and replacing it with a different standard run by the IMF.

Lula’s proposal seemed to be very genuine since early this year China became the largest trading partner of Brazil by displacing the US. Brazil’s exports to China, which primarily consist of iron ore and soy products, jumped to $5.6bn earlier this year, up from $3.4bn for the same period in 2008. The most significant agreement out of the 13 accords signed by Brazil and China was $10bn loan to Brazil in exchange with up to 200,000 barrels of oil per day for the next decade.

According to sources, Bank of China (BOC), the world's third largest bank by market value, will open its first branch in Brazil in two or three months, purportedly a quick response to Lula’s call. In September, Brazil and Argentina signed a similar pact under which traders from both countries could trade in local currency with the US dollar as secondary option. The figures from the Brazilian central bank and trade ministry in last month showed, the two Latin American nations traded $22.6mn in local currency out of more than $1.6bn of total trade.

China is promoting the yuan as an international currency after signing 650bn yuan ($95bn) in swap agreements with Argentina, Indonesia, South Korea, Hong Kong, Malaysia and Belarus since December. Though there are many sceptics to the practicality of the idea, Shi Lei, an analyst in Beijing at the nation's largest foreign-currency exchange said trading yuan or local currency would be a reality with the agreeing nations in a couple of years’ time. The emphasis should be to first start yuan settlement with Hong Kong and build an offshore yuan center to expand channels for yuan use, he added.

China holds $1 trillion investment in the US government debt, the world’s largest such holding, and the country is worried that the US’ ‘spending’ program to counter the recession will weaken the US dollar and eventually devalue the Chinese holdings. This fear has prompted China with the support of likeminded trading partners to minimize over-dependence on the US dollar as the ultimate invoicing currency.

By Jose Roy

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