China is throwing its financial and economic weight around in the emerging markets. It’s funding and building all kinds of infrastructure projects, power plants, mines, dams, and what not, often under dubious conditions and with imported Chinese labor. This isn’t a free gift, but a combination of a resource grab, shrewd financial investment, export policy, and influence grab. China is becoming a world player.
In Argentina, China plays an even larger role. Argentina can’t cheaply borrow money long-term because of its history of defaults and its cavalier attitude about inflation that have wiped out bondholders for generations. And it has a history of forced “pesofication,” most recently last week of dollar-denominated mutual funds.
Lending to Argentina has been a losing proposition. Investing in it has been fraught with risks. It’s rich in resources but has a history of nationalizing foreign companies that invested to produce these resources.
So the country is permanently out of money and has been lumbering through various bouts of financial, economic, and social trouble.
But China opened yuan swap lines with Argentina. Chinese companies are building dams, railroads, and nuclear power plants. In return, with borrowed Chinese money, Argentina imports all kinds of equipment from China including entire trains, in a country where other imports, such as smartphones, due to strict currency controls and dollar shortages, are scarce and expensive.
General elections are coming up this month, and the government wants to get through its tenure without running out of money and without another default and if at all possible without a balance-of-payments crisis.
But its foreign exchange reserves are thinning, especially in dollars, which is what the country needs the most to deal with its debts, cover the cost of its imports, and prop up its peso.
Of the $33 billion in reserves, $10.7 billion is in currencies other than dollars, primarily $9.5 billion in Chinese yuan credits. It also owes $8.1 billion in payments for imports. Which reduces the accessible reserves to a paltry $14 billion. Now Argentina had to make a bond payment of nearly $5 billion. And here is what happened next:
By Bianca Fernet, The Bubble:
Yesterday, Argentina’s Central Bank paid US$4.741 billion to holders of the matured Boden 15 bond. The Central Bank suffered its biggest loss since 2006, with reserves falling to US$27.713 billion. Of the total payment, roughly US$4 billion, or nearly the entire amount, left the country to pay foreign bondholders.
Central Bank President Alejandro Vanoli flew to Lima on Monday night to attend a meeting for Central Bank presidents, where he is confirmed to be meeting with representatives of the People’s Bank of China. The subject of those meetings? To increase the currency swap line from China.
In less than a year, Argentina has all but exhausted the roughly US$11 billion dollar-equivalent swap line with China. This foreign currency credit now makes up approximately 25% of Argentina’s reserves, and the government is looking to increase this amount even though Chinese Yuan can only be used to import goods from China — not to pay dollar-denominated debt or import from other countries.
The Embassy of China confirmed to Cronista that talks to increase the US$11 billion dollar equivalent limit were underway. By Bianca Fernet, The Bubble
So the yuan gains “Staggering Momentum as Major Currency,” according to SWIFT. It comes out of the hide of other currencies, though not the usual suspect. Read… Not the “Death of the Dollar” but “Death of the Euro?”