Analysis | The implications of China’s clearing arrangement with Brazil
Arjan van Tongerlo
In the intensifying geopolitical rivalry between the United States and China, the People’s Republic of China (PRC) recently managed to secure a significant win: the memorandum of understanding signed by China’s central bank to set up yuan clearing arrangements in Brazil. The clearing arrangement will allow for future bilateral trade to be conducted through China’s currency, the renminbi. The Sino-Brazilian deal is a significant step in China’s efforts to increase its global influence, following a series of similar agreements signed in 2022. The deal not only improves trade relations between China and Brazil, but also gives a boost to China’s overall strategy to compete with the United States.
The biggest of many
The deal between China and Brazil follows a series of other deals China arranged in 2022 to increase the reach of the Chinese renminbi (RMB). Last year, China established agreements with Laos, Kazakhstan, and Pakistan to trade with RMB. In addition, the Russian company Gazprom and Chinese state-owned China National Petroleum Corporation signed deals to conduct business solely through rubles and yuan. The deal between China and Brazil, however, is the biggest of its kind. With a trade volume of $141 billion between the two countries in 2021, China has been Brazil’s biggest trade partner for more than a decade. The clearing arrangement in Brazil will enable firms and financial institutions from both countries to further bilateral trade and investment between the worlds’ second and twelfth largest economies. Beyond the obvious economic benefits, the deal is a significant move in China’s competition with the United States.
The Sino-Brazilian deal is part of a larger Chinese strategy to decrease the influence of, and its own reliance on, the U.S. Dollar (USD). As the world’s dominant currency, the USD facilitates most international trade.. China’s arrangements move bilateral trade between China and its partners away from the USD, thereby increasing the influence of the RMB. By the end of 2021, the People’s Bank of China already had authorized 27 clearing banks in 25 countries across the world.
As South America’s biggest economy — Brazil can now conduct its financial transactions with China in RMB — a significant win for Beijing. Considering talks between Brazil and Argentina to establish a common currency, the use of RMB in Sino-Brazilian trade could open the door for other South American countries to establish clearing arrangements with China. However, China is trying to expand its influence beyond just South America. For example, the increasing ties between China and Saudi Arabia have led to Saudi Foreign Minister Mohammad Al-Jaddan stating that Saudi Arabia is open to exporting energy to China through RMB. Such moves by China can have significant implications not only for international trade, but also great power competition with the United States.
The Sino-Brazilian clearing arrangement is an example of China’s strategy to advance its position in the geopolitical landscape. On the one hand, such arrangements increase the position of its own currency, while decreasing the importance of the USD on the other. The first effect that the Chinese clearing arrangements can have on the global system is decreased dependency for China. The Bretton Woods Agreement, signed by 44 countries in 1944, led to the USD replacing gold as the world’s reserve currency in order to stabilize foreign exchange after World War II. The fact that most of the world’s trade was now conducted with dollars gave the United States significant influence. Considering that global USD trade requires states to own large amounts of dollar reserves, the United States holds the power of financial sanctions by freezing USD assets and blacklisting entities. For China, the increasing volume of RMB trade, rather than USD, means that it depends less upon its USD reserves, thereby reducing American influence.
The response to Russia’s invasion of Ukraine in February 2022 is a case in point of how a dependence on foreign currencies can have significant effects, with western allies freezing more than $1 trillion Russian assets. By moving its trade away from the USD, Beijing negates the effects sanctions can have on its foreign currency reserves, thereby changing the cost-benefit calculus for any action that could be perceived as aggressive by the United States. In addition, by establishing bilateral RMB trade relations, China is increasing its own influence in other countries. Similar to American sanctions, a bigger role for the RMB in global trade leads to increased Chinese influence over countries trading in RMB.
The Sino-Brazilian arrangement also exemplifies a further divide between the western world and so-called non-aligned powers. The BRICS forum of Brazil, Russia, India, China, and South Africa implemented numerous proposals over the past decade to partially decouple itself from reliance upon western countries, such as the New Development Bank. The weaponization of the dollar and economic coercion by the United States have also resulted in closer cooperation between numerous non-Western countries. Among the most notable of these attempts are Chinese and Russian alternatives to the Belgium-based banking communications system SWIFT. Moving away from SWIFT would mean a significant reduction in the oversight and potential for economic coercion that the United States and European Union hold over the SWIFT system, such as cutting off numerous Russian banks from the system after Russia’s invasion of Ukraine.
The internationalization of the RMB further improves financial prospects for China. Improvements in its reputation as a reserve currency will lead investors to see Chinese bonds as a safe and liquid investment. Considering that China has gradually reduced its protectionist stance toward its bond market, increasing global usage of RMB will likely result in greater investment in Chinese bonds.
The Sino-Brazilian arrangement is a noteworthy win for China in its strategic competition with the United States. Even so, analysts must take care not to interpret its effects out of context. It is unlikely that the Chinese renminbi will fully challenge the dollar anytime soon. As of December 2022, the RMB accounted for 2.15 percent of global payments, making it the world’s fifth most used currency according to SWIFT data. As noted by Charles Schwab’s managing director Kathy Jones, the dollar is still seen as a safe-haven asset. In times of uncertainty, such as the beginning of the COVID-19 pandemic, investors fell back upon liquid, reliable places to invest, which led to a major spike in the dollar’s value in early 2020. Beijing’s lack of transparency and tight grip over the yuan undermine the prospect of the yuan becoming a stable alternative to the dollar over the short and medium term.
While the RMB will not replace the USD anytime soon, the increasing importance of the RMB does offer China numerous strategic benefits. China’s decreasing reliance on the dollar allows it to be less vulnerable to sanctions, thereby giving China more freedom to act in its own interests. This will allow Beijing to disregard international rule of law and continue to infringe on human rights, such as its repression of Uyghurs. Similarly, a further increase in the use of RMB worldwide will give China more leverage over other countries, increasing its global influence evident in projects such as the Belt and Road Initiative. While the clearing arrangement between China and Brazil will not checkmate the United States on the geopolitical chessboard, it is a move that strengthens Beijing’s position and shows the strategic steps Beijing is taking to advance its interests.
Arjan van Tongerlo is a student in the Security Studies Program at Georgetown University. He is pursuing a Certificate in Diplomatic Studies and is the Associate Editor for Europe & Central Asia for the Georgetown Security Studies Review.
Interested in reading more about the role of currency and about China’s trade policy? Check out ISD’s in-depth case studies library and join the faculty lounge to access free instructor copies:
Case 361 - Dollarization Diplomacy - The Case of Ecuador and El Salvador
This case examines Ecuador and El Salvador's decision to "dollarize," that is, to make the U.S. dollar their official…
Case 140 - Muted Differences: The Negotiations to Normalize U.S.-Chinese Relations
Bernstein, Thomas P. Although Sino-American relations slowly warmed during the 1970s, the United States and the…