Currency Swapping: China and the BRI-S

The fifth BRICS Summit, which took place in Durban, South Africa last month, proved rather productive for Brazil and China, who signed a currency swap agreement first conceived in mid-2012, worth $30bn (190bn yuan, 60bn reais). The agreement will unnerve economists in the global north, as the bonds between the BRICS tighten to create almost material alliances. The swap guarantees 8-10 months of trade revenue for both currencies, in the face of global economic downturn.

But just what is the true motive behind such an agreement? China’s role in the deal is especially in question – its economy, after all, was larger than all of the other BRICS economies put together in 2012, in terms of nominal GDP (according to the IMF). Why, then, should it choose to align itself so closely with Brazil? True, trade with Brazil is on the rise, but there are other motivations circling that provide a deeper insight into Chinese economic relations. Opinion is surfacing, also, that suggests China is sitting on a financial fence, playing with the BRICS alliance until it can challenge the US for global economic hegemony.

The Internationalisation of the Yuan

There are some that believe China’s aim is to challenge the domination of the American Dollar as the base currency of the world economy. The Yuan is rarely held in the international sphere due to the nature of China’s state-controlled markets, so currency swapping will enable the distribution of the Yuan without compromising – too much – the CCP’s influence over production and trade. China already has currency swap deals of varying degrees with several countries, including Argentina and Uzbekistan, that are worth far more than the Brazilian deal. This agreement could simply be the latest addition in a campaign of Sinification towards the global financial system. Neo-liberal economic logic suggests that in order to mount a full-blown assault on the US Dollar, China must fully liberalise both its domestic and transnational economies. The world, therefore, must watch Beijing closely, as only time will tell if this is the true motivation behind the recent currency swapping policies.

Global Economic Insurance

The official motivation behind the deal, as announced by the president of Brazil’s central bank Alexandre Tombini, is to provide protection for Sino-Brazilian trade in the current global economic climate. Both governments recognise their mutual importance to each other’s economies and so are insuring against any shock or market failure that may occur. The Chinese are key importers of Brazilian raw materials, while Brazil, like many other countries, buys manufactured products from China. Holding currency supplies will allow these exchanges to continue, even in the face of global financial crisis; it doesn’t seem that there will be any day-to-day effect, unless one currency were to suddenly fluctuate in value. This deal seems more beneficial to Brazil, whose economy is a quarter of the size of China’s – the security it provides, therefore, is more important to them, than to China who has far more to fall back on.

China and the ‘BRI-S’?

Hence, it would seem that there could be an ulterior motive for China to sign the deal: either for the benefit of their own currency as discussed above, or for their position vis-à-vis the other BRICS nations, and indeed other competitive economies around the world. As mentioned, the Chinese economy is larger than Brazil, Russia, India and South Africa put together, and so there is little logic anymore in maintaining such close ties for mutual benefit. Retiring Goldman Sachs chairman Jim O’Neill may have found a relevant acronym in 2001, but twelve years later, China has pulled away from its once-allies and is growing at a far faster rate, rendering the ‘BRIC’ abbreviation out-dated (South Africa was included in 2010, by the material representation of the BRIC collective). Hence, the deal with Brazil could be considered a contemporary version of an ‘imperial concession’, similar to British oil contracts in Iran, or Russian treaties in Qing China. The agreement guarantees contemporary China the custom it requires to take its economy one step further, and grow to the size of the US.

Conclusion

China’s economic success in the last fifteen years has confirmed the realist notion that the international order of great power rivalries is not yet over. History posits that China will attempt to gather all the economic friends it can in its race to surpass the US as the dominant state in the world system. Hence, one can perceive this latest deal with Brazil as a move to secure a customer base for its products and a market for its funds, rather than an alliance against the choppy seas of the global economy. It would make sense for China to push the Yuan into the international domain. The key moment to watch out for now is how the domestic Chinese political sphere will be forced to adapt to growing international participation and increasingly tense conflict with the neo-liberal forces of the global north, spear-headed by America.

Bibliography

BBC, 2013. ‘China and Brazil Sign $30bn Currency Swap Agreement’. www.bbc.co.uk, 27 March 2013. Retrieved 3 April 2013

IMF, 2012. ‘Economies by GDP (Nominal)’. World Economic Outlook Database, October 2012. Available at www.imf.org. Retrieved 4 April 2013

Leahy, Joe 2012. ‘Brazil and China Agree Currency Swap’. Financial Times, June 22 2012

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