Chinese yuan Photo:VCG

Argentine Economy Minister Sergio Massa will reportedly seek an expansion of the nation's currency swap line during a trip to China this week, a move observers said will help the Latin American country hedge against diminishing dollar reserves.

Massa is expected to arrive in Shanghai on Tuesday and then head to Beijing for meetings with Chinese officials on Friday, Bloomberg reported.

Massa will meet with Yi Gang, governor of the People's Bank of China, the central bank, to discuss the "renewal and expansion" of the swap line, according to Argentina's statement.

An expanded use of the yuan will help Argentina to better handle external risks, especially as the nation is facing a severe crunch in cash reserves, Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told the Global Times on Monday.

Facing inflation of over 100 percent, local economists have estimated that Argentina's central bank has no "liquid cash" reserves left. 

With the official peso' exchange rate down 25 percent against the dollar this year, one of the government's "last-resort" tools to prevent a severe peso devaluation is Argentina's existing China swap line worth 130 billion yuan ($18.4 billion), Bloomberg said.

In January, China and Argentina expanded the currency swap deal. The heads of the Argentine and Chinese central banks confirmed that the deal has been activated and they committed to deepening the use of the yuan in Argentine market.

The swap comprises the exchange of currency for reinforcement of international reserves of 130 billion yuan and a special activation of 35 billion yuan to compensate operations on the foreign exchange market.

It's likely that the reported swap expansion deal might be signed this week, given the two nations' complementary trade structures and China's demand for Argentine commodities, Dong said. If there's a further expansion, bilateral trade connections will further increase.

In the first quarter of 2023, bilateral trade stood at $4.68 billion, a year-on-year increase of 6.6 percent. China's imports reached $2.29 billion, up 58.7 percent, according to Chinese customs data.

The first currency swap between China and Argentina was signed in 2009, worth 70 billion yuan which was valid for three years. In July 2014, the two sides signed a currency swap deal for 70 billion yuan. 

In July 2017, China's central bank renewed the swap agreement with the Central Bank of Argentina. The agreement allows the two central banks to swap 70 billion yuan for 175 billion Argentine pesos.

The two central banks signed a supplementary swap deal for 60 billion yuan in December 2018, in addition to the agreement signed in July 2017. 

In July 2020, the two sides extended the agreement.

Apart from Argentina, China's largest commercial bank, Industrial and Commercial Bank of China, processed the first cross-border yuan settlement in Brazil at its local branch in April.

According to Goldman Sachs, yuan holdings in four Latin American countries - Brazil, Chile, Mexico and Peru - are close to $30 billion, up about 10 times from the end of 2018.

Yuan settlements are expected to boost the region's economic and trade recovery in the post-COVID era and help local companies to find a more reliable alternative to the US dollar as they seek safer cross-border trade and investment deals, observers said.

Global Times