Observatorio argentino 51: What Argentina gets out of its “swap” agreement with the People’s Bank of China
Answer: Twelve months and the ability to pay for Chinese imports in pesos
There has been a lot of oddly breathless coverage of the “swap” agreement that the Banco Central de la República Argentina (BCRA) has with the People’s Bank of China (PBOC). The Argentines are going to start using it to pay for imports. This is supposed to be a sign of Chinese strength because … reasons?
Maybe it is a sign of Chinese strength! I could be missing something. If I am, please correct me in comments. I will be is mildly embarrassed. But there are worse things to be embarrassed about!
All it looks like to me is that the PBOC has agreed to let Argentines use pesos to pay for Chinese imports. The PBOC will assume the exchange rate risk. In return, the PBOC will collect interest at a rate I have not yet been able to discover.
It is pretty clear why that is helpful for Argentina! They get to pay for Chinese imports using their own currency.
It is less clear why that is a sign of Chinese economic power.1 Inflation in Argentina has exceeded 100%. The annual policy rate in Argentina is currently 91 percent. It seems unlikely that the PBOC would charge less.2
If you’re confused, let’s walk it through!
Accounting for swap lines
A swap line is conceptually simple. The creditor central bank makes a loan to the debtor central bank. The creditor agrees to be paid back in the debtor’s currency. The debtor, however, gets a deposit account denominated in the creditor’s currency. At some point in the future, the debtor has to pay back the loan, but in their own currency. In the interim, the debtor central bank pays interest to the creditor.
Here’s what it looks like in balance sheet terms. The BCRA has announced that it is going to draw on roughly one billion U.S. dollars per month. The PBOC books a loan to the BRCA of 231 billion pesos (US$1 billion at the official exchange rate). The BCRA, however, receives the loan in the form of a deposit account at the PBC denominated in renminbi, or 元 7 billion at an exchange of 33 pesos per yuan.
From the BCRA’s point of view, the transaction looks as follows: they receive a renminbi-denominated deposit account at the PBOC, and they owe an equivalent amount in pesos to the PBC. In twelve months, they will have to pay back the peso loan.
Now Argentine importers draw down the BCRA account to pay for imports. There are multiple ways in which this could happen. The simplest, however, is to imagine that exporters swap their pesos for renminbi at the central bank. Importers hand over 231 billion pesos to the BCRA, which in return gives 元 7 billion out to various private Argentine entities. The value of pesos in circulation falls by the AR$ 231 billion that Argentines have handed over to the BCRA. The Argentines, in turn, give 元 7 billion to private Chinese exporters in return for stuff.
In other words, the asset account at the PBOC falls to zero, since the Argentines have withdrawn the money. The amount of pesos in circulation falls by an equivalent amount, since Argentine importers have handed those pesos over to the BCRA in return for renminbi. The balance sheet balances as follows:
Meanwhile, over at the People’s Bank of China, the BCRA still owes 231 billion pesos. So the asset side of the PBOC’s balance sheet is unchanged. But the BCRA has withdrawn 元 7 billion. So the BCRA’s deposit account has now gone to zero. The 元 7 billion hasn’t disappeared, however. It is now sitting in the checking accounts of various Chinese exporters. Those checking accounts appear on the PBOC balance sheet as an additional 7 billion renminbi in circulation. At an exchange rate of 33 pesos per yuan, the PBC balance sheet still balances:
But consider! The Argentines end with no renminbi sitting in the BCRA. In other words, the yuan will have made no progress towards becoming a reserve currency.
In addition, the Chinese will have sent real tangible stuff to Argentina in return for a peso-denominated account sitting at the PBOC.3 In theory, the BCRA should pay the loan back in renminbi at the original exchange rate. But that’s basically saying the same thing as the BCRA could pay it off in pesos that it can print at will.4 It’s a good deal for the Argentine Republic!
But it only be a good deal for for People’s Republic of China if the PBOC charges a sufficiently high interest rate. That said, this isn’t a zero-sum game. The PBOC can charge an interest rate that protects it from losses and Argentina will still benefit from being able to pay for its imports in pesos. But if the interest rate is too low, then China will transfer resources to Argentina.
I see why this deal is good for Argentina.5 And I can suspect why it is good for China: they won’t likely lose anything significant and they buy influence in Buenos Aireas. But I honestly don’t see how invoicing Chinese exports in renminbi while being paid for them in Argentina pesos advances Chinese economic power.
What am I missing?
The Wall Street Journal estimates that the rate on PBOC swap lines is 6 percent, which is quite high. As mentioned in the text, high-inflation Argentina will be charged at least 15 times that.
People who should know, when contacted, do not have any idea what interest rate the PBOC is charging.
Those exports will have been invoiced in renminbi, but the Chinese exporters will receive no higher price than if they had been invoiced in dollars or euros or Brazilian reales.
Unless the PBOC extends the swap line. In which case it’s an even better deal for Argentina. Or, as actually seems to be happening, the
Unless the PBOC charges a truly extortionate interest rate or there is something else non-standard in this arrangement that neither government is willing to mention.
One minor potential benefit for China, other than the political influence, is breaking the barrier to transacting in RMB. Once importers have put the system in place for the first transaction (such as finding Argentine banks that will issue letters of credit in RMB, processing the Central Bank paperwork in RMB, etc.), then those importers will start demanding RMB for future transactions, especially since they would be easier to access than non-existent dollars.
Since a big chunk of Argentine exports (such as soy products) end up in China, both countries could then end up transacting most imports and exports in RMB rather than in USD. Once this RMB denominated trade is large enough, the Argentina Gov't could justify making the RMB of a portfolio of reserve currencies.
There are a lot of ifs in the above mechanism, but worth the bet for China who looks at the long term and for which 7B is nothing.