China appears to be taking the task of acceding to hegemonic, or at least semi-hegemonic, economic status quite seriously.
In July 2014, Argentina reached an agreement with China to request up to US $11 billion in Chinese yuan, swapped for Argentine pesos, over a three year period. The first tranche of the equivalent of US $814 million was received by Argentina’s Central Bank on 30 October 2014. The second tranche of the equivalent of US $500 million hit the bank on 17 November 2014. Each swap must be swapped back within a 12 month period.
This swap helped Argentina out because it eased the pressure on the peso by making it worth relatively more in foreign currency terms. Come again?
While all eyes are on the ARS/USD exchange rate, in reality that rate is only representative of the ARS/REST OF WORLD exchange rate. By swapping yuan with China, Argentina has more yuan and fewer pesos, and can exchange the yuan for dollars or euros on international markets, thus increasing the value of the peso vis-à-vis the rest of the currencies in the world, including the US dollar.
Now two Chinese ministers, Foreign Minister Wang Yi and Commerce Minister Gao Hucheng, have offered the same support to Russia, whose ruble is having a pretty lousy Christmas this year due to plummeting gas prices and biting sanctions in response to that whole Ukraine/war thing. Sad face.
While Chinese support doesn’t fix the main problems in either country, namely capital outflow unmatched by inward investment, poor access to global markets due to sanctions or the default, and now plunging oil prices, the intervention caused both the peso and the ruble to rebound.
In both cases, China has elected to exchange its relatively valuable currency for one that is remarkably unstable and likely to lose value. For each tranche swapped, it will have to hold the pesos or rubles for up to one year before swapping it back for yuan. And China is taking the risk that in one year possibly Argentina or Russia might not have the purchasing power to buy yuan on world markets in the event of a currency crisis. So why would China take these risks in countries where other lenders or investors have shied away?
Resources. And consumer bases.
By swapping yuan for rubles or pesos, China is putting yuan in the hands of two countries with significant consumer bases. And what are yuan used for besides propping up flailing currencies? Buying Chinese crap!
Argentina and Russia are both resource exporters. Argentina’s economy pretty much hinges on exporting agricultural products, and also possesses oil and gas, precious and base metals, and bulk commodities. Russia’s economy is oil. China can use the swapped pesos and rubles to buy these valuable and needed commodities from its trading partners.
At the end of the 12 month tenor of each swapped tranche, Argentina and Russia will have to return the yuan and receive pesos and rubles respectively in return. And this will bring back the same dilemma the countries face today – how to access valuable hard foreign currency. Assuming that the peso and ruble are currently not victims of short term speculative attacks but rather that the rapid depreciation is symptomatic of unsustainable policies and practices, this swap is doing nothing more than buying time.
At the end of the swap, Argentina and Russia will be paying for borrowed time with their nations’ resources.
China is taking yet another a strategic step to embed the yuan more firmly in international trade and in doing so dislodge the US dollar from its uncontested position as the global transaction and reserve currency.
So what should we do? Freak out and panic and buy gold while learning Chinese and digging a bomb shelter to hide the gold in? No.
Money is, at the end of the day, somewhere between a tool and a philosophical idea. At one end of the spectrum it allows goods and services to change hands, and at the other it dominates and destroys lives.
So just take note, and be aware that the tides of global monetary power are shifting and China is staking its claim. But we’ll all probably be ok. Apocalypse later. Possibly open an account somewhere you can hold some yuan if you’re concerned.
And order Chinese takeaway for dinner.