China adds some bite to its global currency bark

China adds some bite to its global currency bark

No one is betting on the health of Argentina’s economy these days. Ever since the country defaulted on its international debt in 2001, confidence that its economic situation could turn around has been extremely low. Indeed, in February, when the Argentine government requested permission to once again enter its bonds into U.S. capital markets, the Wall Street Journal suggested this response:

The SEC should instead insist that Argentine securities bear a warning like cigarette packages: ‘This issuer has a record of misrepresentation, debt defaults and debt repudiation, and therefore may be dangerous to your financial health. Do not consume this issuer’s bonds unless you have a platoon of lawyers and a Navy to back them up, and you’re prepared to use both.'”

Why, then, would China use this week’s Inter-American Development Bank meeting in Medillín to agree to a $10.24 billion currency swap with a country whose bonds could be worth next to nothing by the end of 2010? Two reasons seem apparent — one is straightforward, the other is disturbing.

First, as Xinhua reports, the Argentines can essentially use the RMB as extra cash to pay for imports. But one might note that, since the Yuan is not a convertible currency, the money can only be used to purchase goods from — you guessed it — China, potentially giving a boost the Dragon’s ailing export sector.

The other reason for the swap seems more strategic, especially in conjunction with other currency trades that China has very quietly signed with Malaysia, Hong Kong, South Korea, Belarus, and Indonesia over the past three months. As the Financial Times puts it:

Economists…see Beijing’s currency swap deals as pieces in a jigsaw designed to promote wider international use of the renminbi, starting with making it more acceptable for trade and aiming at establishing it as a reserve currency in Asia, something that would also enhance China’s political clout.” 

Combine these actions with China’s recent call to replace the U.S. dollar as the international reserve unit, and it starts to look like this currency swap has nothing at all to do with Argentina.