Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.
The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.
Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.
An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.
“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”
Henrique Meirelles and Zhou Xiaochuan, governors of the two countries’ central banks, were expected to meet soon to discuss the matter, the official said.
Brazil: Exports to ChinaMr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.
In an essay posted on the People’s Bank of China’s website, Mr Zhou said the goal would be to create a reserve currency “that is disconnected from individual nations”.
In September, Brazil and Argentina signed an agreement under which importers and exporters in the two countries may make and receive payments in pesos and reals, although they may also continue to use the US dollar if they prefer.
An aide to Mr Lula da Silva on his visit to Beijing said the political will to enact a similar deal with China was clearly present. “Something that would have been unthinkable 10 years ago is a real possibility today,” he said. “Strong currencies like the real and the renminbi are perfectly capable of being used as trade currencies, as is the case between Brazil and Argentina.”
In what was interpreted as a sign of Chinese concern about the future of the dollar, the governor of China’s central bank proposed in March that the US dollar be replaced as the world’s de-facto reserve currency.
In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency ”that is disconnected from individual nations” and modelled on the International Monetary Fund’s special drawing rights, or SDRs.
Economists have argued that while the SDR plan is unfeasible now, bilateral deals between Beijing and its trading partners could act as pieces in a jigsaw designed to promote wider international use of the renminbi.
Any move to make the renminbi more acceptable for international trade, or to help establish it as a regional reserve currency in Asia, could enhance China’s political clout around the world.
* * *
Brazil Turns to China to Help Finance Oil Projects With Credit Markets Tight, President da Silva Hunts for Funding in Beijing, Offering His Hosts Secure Commodity Supplies By JOHN LYONS Wall Street Journal May 18 2009
SÃO PAULO -- Brazil's oil industry is turning to China for cash in the latest sign of how Beijing's clout is growing amid the global economic downturn.
Brazilian President Luiz Inácio Lula da Silva was set to arrive in Beijing Monday to meet with Chinese President Hu Jintao, who is expected to unleash billions of dollars of credit to help Brazil exploit its massive oil reserves. Brazil will return the favor by guaranteeing oil shipments to Chinese companies.
The nations are being thrust together by the global financial crisis. Brazil's state-controlled oil giant, Petroleo Brasileiro SA, wants to spend $174 billion over the next five years to elevate Brazil into the major leagues of oil-producing nations. With international capital markets on life support, China is among the few remaining sources of cash.
Petrobras, as the company is known, is turning to China at a time when China's appetite for raw materials has lifted economies across commodity-rich Latin America, blunting the impact of the global downturn. In March, China passed the U.S. as Brazil's biggest trade partner.
Terms of the arrangement had yet to be finalized before the Brazilian leader departed, a senior Petrobras official said, although a broad outline of the talks was announced by Petrobras earlier this year. On the table is a $10 billion loan in exchange for as many as 200,000 barrels per day. China's chief goal, however, is to use the loans to win deals to provide services and equipment at a time when Brazil is becoming tougher in dealing with foreign companies, industry experts said.
Even before a deal is done, the months-long negotiations between Chinese and Brazilian officials have illustrated a competitive advantage for China's government-backed companies at a time when credit markets are dry. Underscoring China's importance as a lender of last resort, Brazil engaged China even though many of its past investment initiatives with the nation have ended in disappointment.
"The U.S. has a problem," Sergio Gabrielli, chief executive of Petrobras, said recently when asked about the loan talks. "There isn't someone in the U.S. government that we can sit down with and have the kinds of discussions we're having with the Chinese."
Mr. Gabrielli was referring to the fact that Chinese government banks are willing to extend huge foreign loans to further China's long-term energy-security goals: ensuring diverse global supplies and winning entree into competitive regions for its oil companies. A string of recent oil loans to Russia, Kazakhstan and others has pushed China's total commitments to more than $45 billion.
Such direct government lending is an increasingly powerful tool in an era when three-quarters of the world's oil reserves are in the hands of state-controlled oil companies. By dealing directly with governments in oil-supplier nations, China can use its wealth to reduce the role of big oil companies -- the traditional intermediaries between oil producers and oil consumers.
"What you are seeing is the new geopolitics of oil, where deals start from a political understanding and cut out the international oil companies," says Roger Diwan, a partner at PFC Energy, a Houston-based consultancy.
To be sure, international oil companies such as Exxon Mobil Corp. and Royal Dutch Shell PLC have important advantages in technology and managerial know-how over state companies. Brazil's most tantalizing oil reserves lie miles beneath ocean, rock and unstable layers of salt. Getting it out likely will require the expertise and muscle of the industry's top companies.
What's more, China's willingness to fund oil projects should ultimately help the U.S. consumer, experts say. Most of the world's oil is sold on the international spot market to the highest bidder. China's willingness to extend credit to oil producers should keep prices from rising simply by increasing the global supply of oil.
Brazil's Petrobras, which is controlled by the government but operates with a free-market ethos and has shares trading on the New York Stock Exchange, is in an unusual position for the global oil industry after notching major oil and gas finds. The company is sitting on far more reserves than it has people and money to pump.
Brazil hatched an ambitious plan to change that, and it has vowed to make it happen even in the downturn. "It's willing to do deals where necessary," says Matthew Shaw, a senior Latin American analyst at Wood Mackenzie, a Scotland-based oil consultancy.