Illustration: Chen Xia/GT
The People’s Bank of China (PBC), the central bank, and the Central Bank of Brazil on Tuesday signed a memorandum of understanding on financial strategic cooperation and renewed their bilateral local currency swap agreement. The renewed 190 billion yuan/157 billion reais ($27.69 billion) local currency swap agreement between China and Brazil is valid for five years and can be renewed upon mutual consent, according to a release by PBC.
The driving forces behind the currency cooperation between China and Brazil stem from the challenging international financial environment. Brazil, like many emerging economies, is facing multiple pressures from the volatility of the US dollar. Protectionist US policies and the deterioration of its fiscal situation have cast a shadow over the US dollar. The size of US national debt has surpassed $36 trillion, while the US government’s tariff policy has brought unprecedented trade turmoil to the world. All these sources of risk and uncertainty have put the reliability of the global dollar-denominated financial system under scrutiny.
Against this backdrop, the China-Brazil currency swap will mean that the South American country can tap into yuan liquidity to stabilize its foreign exchange market and cushion the impact of financial turmoil when facing balance-of-payments stress. This development will not only underscore the deepening of financial ties between China and Brazil, but also serve as a positive example for other Latin American countries grappling with the volatility of the international financial market.
The increasingly close economic and trade relationship between the two countries calls for strengthening financial collaboration. Since 2009, China has consistently been Brazil’s largest trading partner. According to Chinese customs statistics, bilateral trade reached $188.17 billion in 2024, a year-on-year increase of 3.56 percent. China primarily exports machinery, chemicals, telecommunications equipment and textiles to Brazil, while importing iron ore, soybeans, crude oil and pulp.
The significant level of trade has highlighted the need for a more stable and efficient settlement mechanism, as the traditional dollar-based system exposes businesses on both sides to the volatility of the dollar exchange rate and incurs additional transaction costs. In this context, a currency swap agreement could offer enhanced financial support for local currency settlements. This arrangement would enable companies from both China and Brazil to conduct transactions and investments in their respective local currencies. Brazilian companies could trade with their Chinese counterparts using the Brazilian real, while Chinese companies could do the same with the yuan, which effectively lowers transaction costs by reducing currency exchanges with the US dollar.
Beyond trade facilitation, the China-Brazil currency swap mechanism also creates a more stable financial environment for mutual investment. Encouraging the use of local currencies for settlement mitigates exchange rate risks, enabling investors to more accurately evaluate the real returns on projects. This, in turn, will promote greater investment cooperation between the two developing countries.
The currency swap could have a significant demonstration effect during times of financial uncertainty. Latin American nations, which have historically faced dollar liquidity crises, such as capital flight during US rate hikes, currency depreciation and debt spirals, urgently need diversified financial buffers. In this context, currency swaps may provide regional countries with an alternative means to alleviate liquidity pressures.
Meanwhile, the promotion of the yuan’s internationalization in the Latin American region still faces numerous challenges. The US dollar’s entrenched dominance in regional trade and finance is unlikely to change in the short term. However, it is foreseeable that as more and more countries seek to reduce their dependence on a single-currency system, similar regional financial cooperation arrangements will continue to emerge. In this sense, a currency swap agreement represents a significant stride toward a more multi-polar and resilient global financial order.
