Use The Yuan? Get Real!
During Brazilian President Lula’s recent visit to China, the leaders of the two countries have been discussing, among other things, the prospects of abandoning the US dollar in bilateral trade operations. This would mean that Chinese importers would purchase Brazilian goods in Chinese yuan, and vice versa.
Personally, I couldn’t agree more with former Brazilian central bank President Gustavo Franco (1997-1999), who stated that proposals to abandon the dollar for bilateral trade are ‘pure idle talk’. Indeed, I believe that such discussions are little more than a political PR stunt. The real reason behind the mutual backslapping, in my view, is for Beijing and Brasilia to flex their growing political muscle as the G7 and IMF look on.
In fact, the economic viability of this proposal remains highly questionable. Although such proposals come in light of China becoming the top export destination for Brazilian goods (ahead of the US) for the first time in March and April, and China looking to diversify its foreign currency holdings away from US dollars, both the real and yuan currently remain relatively illiquid for exporters to easily convert into domestic currency. A similar scheme between Brazil and Argentina has failed to take off in recent months, as exporters continue to prefer US dollar holdings over other foreign currency. As long as companies have a choice, therefore, they will always pick the convertible currency – i.e. the greenback – over a virtually non-convertible currency!
Brazilian Exports by Country (Top Two Destinations), US$mn
The US dollar remains the global reserve currency, and I expect it to stay that way for the foreseeable future. Thus, the prospects of the People’s Bank of China and the Banco do Brasil accumulating sufficient real and yuan holdings, respectively, to act as an efficient clearing house for local exporters seem a long way off. In addition to liquidity and deliverability concerns, another key obstacle would be exchange rate volatility, with spikes in risk aversion leading to rapid sell-offs in the value of the real.