In a significant move, China and Brazil have agreed to trade in their respective currencies, bypassing the US dollar. The deal aims to strengthen the bilateral ties between the two emerging economies and help them reduce their dependence on the dollar, which has long been the dominant currency in international trade.
The agreement was signed during a virtual meeting between Chinese President Xi Jinping and Brazilian President Jair Bolsonaro on November 5, 2021. The two leaders hailed the deal as a historic milestone in their countries' relations and emphasised the potential benefits it could bring to their economies.
Under the terms of the agreement, China and Brazil will be able to conduct trade and investment in their local currencies, namely the yuan and the real. This move is expected to reduce their reliance on the US dollar and lower transaction costs, making it easier for businesses in both countries to conduct trade with each other.
The deal is part of China's broader efforts to promote the use of its currency in international trade and finance, as it seeks to challenge the dominance of the US dollar. China has been steadily increasing its use of the yuan in trade with other countries and has signed similar currency swap agreements with several other nations, including Russia, Japan, and South Korea.
For Brazil, the deal is seen as an opportunity to diversify its trade partners and reduce its dependence on the US market. Brazil has traditionally relied heavily on exports to the US, but the Covid-19 pandemic and other economic factors have led to a decline in demand from the US, prompting Brazilian businesses to look for new markets.
The deal also comes at a time when both countries are facing pressure from the US, which has been imposing sanctions and tariffs on China and Brazil in recent years. By bypassing the dollar, China and Brazil can insulate themselves from the impact of US policies and reduce their vulnerability to US economic pressure.
However, the deal is not without its challenges. One potential issue is the lack of liquidity in the yuan and the real compared to the US dollar, which could make it more difficult for businesses to use these currencies in international trade. Another challenge is the need for both countries to maintain a stable exchange rate between their currencies, which could require intervention from their central banks.
Despite these challenges, the China-Brazil currency swap deal is a significant step towards a more multipolar world order, where the dominance of the US dollar is challenged by other currencies. As more countries seek to reduce their reliance on the dollar and promote their own currencies, the international monetary system could undergo a significant transformation in the coming years.
In conclusion, the China-Brazil currency swap deal marks a historic milestone in the relations between the two emerging economies and has the potential to bring significant benefits to their economies. By reducing their dependence on the US dollar and promoting the use of their own currencies in trade and investment, China and Brazil are challenging the dominance of the dollar in the international monetary system and paving the way towards a more multipolar world order.