Friday, October 31, 2014
Central Bank gets first tranche of China currency swap deal
President Cristina Fernández de Kirchner welcomes Chinese Foreign Minister Wang Yin at Government House last April.
Central Bank reserves grow US$721 million and close at US$28.101 billion
The Central Bank yesterday received the first part of a multi-billion dollar currency swap with China’s Central Bank, worth the equivalent of US$814 million. The swap allowed the country to bolster its foreign reserves, which rose US$721 million and closed at US$28.101 billion.
The currency swap agreement was a cornerstone of a string of deals President Cristina Fernández de Kirchner sealed with her Chinese counterpart Xi Jinping in Buenos Aires in July. Since the deal was signed, the federal government has been speeding up its activation to bolster reserves at a time when the monetary authority’s coffers continue decreasing.
Thanks to the US$721 million growth reported yesterday, Central Bank foreign-currency reserves accumulate so far this week a US$698 million increase growing this month by US$235 million. Nevertheless, a US$2.498 billion drop has been registered so far this year.
The activation of the deal was reported by the Central Bank, which said it transfered the equivalent of US$814 million in pesos to China’s Central Bank in order to follow the terms of the deal. At the same time, the monetary authority highlighted the instrument will help to “stabilize the bilateral trade balance.”
“The Central Bank started yesterday to have yuans in its foreign currency reserves, a currency that is on the way to being one of the most important in use for reserves,” the monetary authority said on a press release. “The yuan represents a very attractive investment currency for central banks since its value compared to other currencies has been improving steadily over the last few years.”
According to the terms of the deal, similar to a previous accord signed in 2009 but which was never implemented and expired in 2012, the Central Bank is entitled to ask for the total or partial disbursement of 70 billion yuan (US$11 billion) in exchange for pesos to invest it, or to exchange it for dollars to up its reserves. The new deal also runs for three years and specifies that the loan has to be paid in 12 months with an interest rate of between six to seven percent.
“The activation of the swap shows the close relationship between both central banks and the commitment by China and Argentina to secure their integral strategic partnership, which was reaffirmed by Chinese President Xi Jinping in his visit to Argentina,” the Central Bank said.
The yuan today can be freely converted into US dollars, euros or other currencies in Hong Kong, London or Singapore and because of that various entral banks have decided to convert parts of their reserves into yuans, including Indonesia,the United Kingdom, Brazil, Singapore, Ukraine, Australia, Turkey, the United Arab Emirates, Hong Kong, South Korea and New Zealand, among others.
In October of 2013, the European Central Bank (ECB) — a key actor in the European financial system and an engineer of its still nascent recovery — agreed with the People’s Bank of China a currency swap worth 45 billion euros. For the ECB, “the swap arrangement is intended to serve as a backstop liquidity facility and to reassure euro-area banks of the continuous provision of Chinese yuan.”
The People’s Republic of China has also made it a central part of its foreign policy to promote the yuan as an international means of exchange to replace the US dollar. According to ICBC’s data, this year the yuan displaced the Swiss franc as the seventh most widely used currency in international trade, rising from 0.63 percent of operations to 1.39 percent, more than doubling its share of the pie. It is widely expected that this trend will continue.
Moving forward with the swap is a strong sign of the budding commercial relationship between Buenos Aires and Beijing at a time when Argentina has been locked out of international credit markets. International credit-rating agencies claim Argentina entered default at the end of July, after US District Judge Thomas Griesa blocked a debt payment due to a long-standing conflict with “vulture “ funds.
Ties between Argentina and the East Asian giant have been deepening, with President Xi Jinping visiting the country in July and confirming Chinese investments in hydroelectric and nuclear energy, plus railway and maritime infrastructure, as well as clearing the ground for the swap deal that was confirmed days later.
During his last visit, Xi hailed the progressive relationship between both countries.
“We have just marked 10 years in the strategic association between Argentina and China and the time has come to open new horizons,” he said. “Our two countries find themselves at a historic starting point.”
Regionally speaking, trade between China and Latin America saw a whopping 1,200-percent increase between 2000 and 2009, a trend that has continued since. Accordingly, China has also been increasing its regional clout when compared to the traditional European and North American metropolises. Massive trade-oriented infrastructure projects, such as the Nicaraguan Channel, expected to be financed by China in the next decade to counter the traditionally US-dominated Panama Canal, have also made progress.
The Central Bank yesterday purchased US$40 million, which helped to maintain the peso stable at 8.515 to the dollar and to increase the foreign currency reserves as well. The monetary authority had to use US$46 million of its reserves for a payment for energy imports.
The “blue” or illegal dollar dropped 20 cents yesterday and closed at 14.33 pesos, amid fear of traders over new raids to be done by the Central Bank officials. It was the steepest drop since October 6 when the currency had registered a 35-cent drop. So far this week, it accumulates a 32-cent drop and so far this month a drop of 1.37 pesos. At the same time, the blue-chip swap rose one cent and closed at 13.05 pesos.
Herald with Reuters