China, Brazil would exit dollar in bilateral trade

Section:

By Krista Hughes and Tamora Vidaillet
Reuters
Sunday, June 28, 2009

http://www.reuters.com/article/asianCurrencyNews/idUSLS14673020090628

BASEL, Switzerland -- China and Brazil are working on a currency arrangement to allow exporters and importers to settle deals in their local currencies, bypassing the U.S. dollar, the countries' central banks said on Sunday.

China's central bank governor Zhou Xiaochuan and Brazil's Central Bank President Henrique Meirelles discussed the bilateral deal in a meeting at the Bank for International Settlements on Saturday.

"It is agreed in principle," a spokeswoman for the Brazilian central bank told Reuters. "They will start to study this."

No details were available on the size of the arrangement or the timeline for finalising details.

Zhou said a further step was for Brazilian President Luiz Inacio Lula da Silva and Chinese President Hu Jintao to discuss the arrangement, which, he said, would not necessarily involve a currency swap like those China has in place with other countries.

"What we are discussing is that Brazil's president, Mr. Lula, and our president, Mr. Hu, talk about the possibility and gradual development to use our local currency for some trade settlement and ... investment. That's the major thing," he told reporters.

"It's not necessarily to use a currency swap."

The People's Bank of China has arranged six bilateral currency swaps, totalling 650 billion yuan ($95.12 billion), since December with countries including Malaysia, Argentina, and Hong Kong.

Under the arrangements, a central bank on the other side of the swap will be able to lend the yuan provided by the PBOC to domestic commercial entities to pay for imports.

Chinese exporters are thus paid in their home currency, eliminating exchange-rate risks and reducing the cost of fund transfers. The same applies in the other direction of the swap.

Brazil is not afraid of slowly diversifying out of U.S. dollars in its investments and international trade, as long as the process is safe and not an "adventure," its foreign minister, Celso Amorim, said on Friday.

Comments from major emerging market nations such as Russia and China suggesting the need for a global reserve currency other than the dollar have pressured the greenback in the past few weeks.

On Friday the Chinese central bank renewed its call for the creation of a super-sovereign reserve currency, saying dollar dominance has worsened the financial crisis.

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