China, Brazil can cut costs by using yuan clearing in bilateral trade instead of US dollar: analysts
Published: Mar 30, 2023 11:23 PM
Photo: IC

Photo: IC

The memorandum of understanding (MOU) China and Brazil signed earlier this year to establish a yuan clearing arrangement will be conducive for promoting bilateral trade and facilitating investment, the Chinese foreign ministry said on Thursday.

The yuan clearing deal was among some 20 cooperation agreements signed between China and Brazil during the Brazil-China Economic Seminar in Beijing, according to a statement released on Wednesday on the website of the Brazilian Trade and Investment Promotion Agency (Apex-Brasil).

Banco BOCOM BBM announced its use of the China Interbank Payment System (CIPS), which is the Chinese alternative to SWIFT. The aim is to reduce the costs of commercial transactions thanks to direct exchanges between the Brazilian real and China's yuan. The bank will be the first direct participant in this system in South America, it said.

The Brazilian branch of Industrial and Commercial Bank of China will be the local yuan clearing bank in Brazil. The easing of restrictions on use of the yuan is aimed at further promoting bilateral trade and facilitating investment using yuan, according to Apex-Brasil.

The central banks of China and Brazil in February signed an MOU on establishing yuan clearing arrangements in Brazil, according to a statement released on the website of the People's Bank of China on February 7.

"After the MOU signing in February, we continued with operation procedures, including the selection of financial institutions," Tang Jie, researcher of Latin American Affairs with the Institute of American & Oceanian studies at the Chinese Academy of International Trade and Economic Cooperation, told the Global Times on Thursday.

The signing will boost China's major imports from Brazil, such as corn, soybeans, minerals and meat, said Tang.

Analysts said that while stimulating trade and investment, the yuan clearing agreement also marked another step toward the internationalization of the yuan.

According to media reports, more than 30 countries, including Russia, Iran, the UAE, Dubai, India, Singapore, Venezuela, Turkey, Indonesia and Belarus, have gradually turned to use of the yuan in trade settlement.

More countries are considering reducing the use of US dollars in transactions. For example, finance ministers and central bank governors of the Association of Southeast Asian Nations (ASEAN) on Tuesday discussed reducing dependence on the US dollar, euro, yen, and British pound and moving to settlement in local currencies.

Local currency clearing would be good for both countries, as it will effectively reduce the interest rate costs from use of the US dollar as an intermediate currency, Wang Youming, senior research fellow and director of the Department for Developing Countries Studies at the China Institute of International Studies, told the Global Times on Thursday.

"Although the two countries are important trading partners, the US dollar has long been used as an intermediary currency in trade and some investments," Wang noted.

He stressed that the US' irresponsible monetary policy, especially continuous interest rate hikes, has led to depreciation of the Brazilian real and increased costs in transactions.

According to statistics from the General Administration of Customs, China has been Brazil's largest trading partner for 14 years in a row. In 2022, bilateral trade reached $171.49 billion, up 4.9 percent year-on-year.