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Author`s name Alex Naumov

China and Brazil try to flee from the US dollar

By Marc Chandler

Brazil's state visit to China has set the chins wagging. Will an agreement be struck to invoice their bilateral trade in their own currencies rather than the dollar? Brazilian President Lula had made some allusions to this last month around the G20 meeting.

In a note Monday, we tried to highlight the distinction between declaratory policy - in terms of investment agreements between China and Brazil - and operational policy - what is really done.

Today Brazil and China reached 13 new agreements, including China's Development Bank, and signed a $10 bln credit agreement with Petrobras and $800 mln credit line for the Brazilian government's development bank. This is very much as expected.

Contrary to speculation that circulated, there was no agreement on the invoicing currency for bilateral trade. In March and April, China and Brazil's bilateral trade surpassed Brazil-US bilateral trade. Although this likely more a function of the deep contraction in the US than a surge in China-Brazil trade, it may be adding fuel to such talk.

No doubt the two countries would like to settle trade flows in their own currencies, so when Brazil buys goods from China it pays in reals and when China buys goods from Brazil it would pay in yuan. But neither country is really prepared for this. That is why Brazilian officials quoted by the news wires say something innocuous, like "it is something we will work towards". This is hardly news. China is working toward making its currency convertible, but it is not there yet. There are several considerations that go into making a currency an attractive invoicing unit, and official desires do not rank that high. Even for the euro zone, not much more than half their exports are invoiced in euros.

Using the BRL or CNY as an invoicing currency instead of the dollar would pose new risks to businesses in both countries that officials, pursuing status, may not fully appreciate. Those currencies are not nearly as liquid as the dollar. The Chinese currency is not really traded outside of China and the Brazil real has liquidity to speak of only a few hours a day and none while Chinese markets are open.

Separately, though related, China's economy does not simply complement other developing economies, but it also competes with them. Lula, who is not known for his nuanced thinking, has embraced the BRICs as some kind of singularity and not a clever marketing device. The raw materials that China is so hungry for will be used to boost China's productive capacity and manufacture goods that will then compete with other developing economies, like Brazil. That kind of trade may help underpin exports, but it does not lead to development in the same way that the US direct investment strategy--building plant and production locally--frequently does.

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