China, Brazil Working on Trade Currency Arrangements

China and Brazil are working on a currency arrangement to allow exporters and importers to settle deals in their local currencies, bypassing the U.S. dollar, the countries' central banks said on Sunday.

Eugene Hoshiko / AP

Speaking on the sidelines of the Bank for International Settlement's annual general meeting in the Swiss city of Basel, other central bankers questioned the dollar's future role as the world's dominant reserve currency.

China's Central Bank Governor Zhou Xiaochuan and Brazil's Central Bank President Henrique Meirelles discussed the bilateral deal in a meeting at the BIS on Saturday.

"It is agreed in principle," a spokeswoman for the Brazilian central bank told Reuters. "They will start to study this."

No details were available on the size of the arrangement or the timeline for finalizing details.
   
Alternative To US Dollar   

The debate of an alternative international currency to the dollar has heated up in recent months after the world's key reserve holders in emerging economies have expressed concern about the U.S. dollar remaining the dominant reserve currency.

As emerging nations gain more clout in the global economy, they also want to study how they might increase the use of local currencies in international trade.

China -- the world's top holder of foreign exchange reserves -- renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar's global domination, which it said had worsened the financial crisis.

Russia, whose reserves are the world's third largest, has also called for the world to become less dependent on the dollar.

"You have China, Russia proposing we should think about a more international reserve currency other than the dollar," Jassem Al-Mannai, director general, Arab Monetary Fund said in a Reuters interview. "America, through this crisis, accumulated huge debts. It's a heavy burden on the dollar."

Argentina's central bank Governor Martin Redrado told Reuters that the dollar will have to share the global stage with strong regional currencies such as the Chinese yuan and Brazilian real in the future.

"The yuan will have a role in Asia with the yen; obviously the euro; in South America probably the real .. so we are looking at a world in which the dollar will continue to be the leading currency, but it will be a much more shared approach," he said.

Philippine central bank Governor Amando Tetangco also told Reuters in Basel that the recent trend of diversification away from the dollar is set to continue.

"(For) emerging central banks to shift out of the U.S. dollar, it has been always an option and this has happened to some extent in the form of diversification into foreign currencies ... This process will inevitably continue," he said.

Yuan's Internationalization

Zhou said a further step was for Brazilian President Luiz Inacio Lula da Silva and Chinese President Hu Jintao to discuss the arrangement, which he said would not necessarily involve a currency swap like those China has in place with other countries.

"What we are discussing is that Brazil's president Mr Lula and our president Mr Hu talk about the possibility and gradual development to use our local currency for some trade settlement and ... investment, that's the major thing," he told reporters. "It's not necessarily to use a currency swap."

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The People's Bank of China has arranged six bilateral currency swaps, totaling 650 billion yuan ($95.12 billion), since December with countries including Malaysia, Argentina and Hong Kong.

Under the arrangements, a central bank on the other side of the swap will be able to lend the yuan provided by the PBOC to domestic commercial entities to pay for imports.

Chinese exporters are thus paid in their home currency, eliminating exchange rate risks and reducing the cost of fund transfers. The same applies in the other direction of the swap.

Brazil is not afraid of slowly diversifying out of U.S. dollars in its investments and international trade, as long as the process is safe and not an "adventure," Foreign Minister Celso Amorim said on Friday.

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