China expands its currency-swap geography

July 9, 2012

A currency-swap agreement between the BRICS countries may pave the way for creating an alternative financial system, a host of Moscow-based experts said in separate interviews with the Voice of Russia on Tuesday. They commented on a recent agreement between Brazil and China that will allow their respective central banks to exchange local currencies worth up to about 30 billion rubles.

According to experts, the agreement is part of China’s efforts to seek a more global role for the yuan.

The deal was clinched during last week’s G-20 Summit in Mexico, where the BRICS leaders agreed to create a system of mutual swap-currency lines. The swap-currency agreements stipulate the BRICS countries exchanging their national currencies and sticking to mutual buyback transaction obligations.

Under the agreements, the money can be used to shore up reserves in the times of crisis or put toward boosting bilateral trade, explains financial expert Andrei Lusnikov.

“Developed counties are already using currency swaps as a short-term measure to contain the liquidity crisis, Lusnikov says, citing the US Federal Reserve, the European Central Bank, the British Central Bank and other national banks that deal with currency swaps. In this regard, a currency-swap agreement between the BRICS countries is an additional step to weather the crisis,” Lusnikov adds.

The hope is that the launching of swap lines will help BRICS countries to avoid a situation like that of 2008, when the volume of world trade nose-dived due to a deficiency in total dollar sales. In this vein, Beijing is all but sure to benefit from the currency-swap agreement, Lusnikov says.

“China has already signed a spate of currency-swap agreements with many countries in a bid to deal with mutual transactions without leaning on the dollar, Lesnikov says. I think that the next few years will see the yuan turn into one of the world’s reserve currencies,” he concludes.

Meanwhile, the BRICS countries are successfully implementing a series of projects on expanding the global clout of their national currencies. Russia’s Moscow Interbank Currency Exchange, for example, started trading the yuan against the ruble for the first time in December 2010, in a move that may add significantly to the transformation of the global financial system. Economics expert Sergei Khestanov points to a swap-currency mechanism which is already being used by the BRICS countries.

“This mechanism is yet to be developed Khestanov says, stressing the significance of the swap-currency agreement.

“By the way, he recalls, the Bretton Woods system of monetary management, which established the rules for commercial and financial relations among the world’s major industrial states between 1944 and 1971, was based on agreements that were somewhat similar to the one clinched between China and Brazil.

In other words, Khestanov concludes, the development of the current swap-currency trend will herald the beginning of the formation of an alternative global financial system.”

A total of 20 currency-swap deals have already been clinched between China and the ASEAN countries as part of the so-called Chiang Mai Initiative, a multilateral currency-swap agreement signed in 2010. As for the BRICS currency-swap system, it will be officially presented during a BRICS summit in South Africa in 2012.

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