Local Currency Settlement Helps China and Brazil Trade Advance Together

Jorge Viana, Director of the Brazilian Export and Investment Promotion Agency, stated at a recent China Brazil Business Seminar that as of 2022, China has become Brazil's largest trading partner for 14 consecutive years. Many projects invested by Chinese companies have become local development "business cards". According to Chinese customs statistics, the bilateral trade volume between China and Brazil reached 171.49 billion US dollars in 2022, a year-on-year increase of 4.9%. Recently, the Brazilian government publicly stated that China and Brazil have reached an agreement to no longer use the US dollar as the intermediate currency and instead use their local currency for trade settlement.

Wu Lichao, Associate Professor of International Economics and Trade at the School of Economics at Xiamen University, stated in an interview with China Trade Daily that the use of local currency settlement between China and Brazil will promote the steady development of bilateral trade and further deepen the economic and trade relations between China and Brazil. This can reduce the fees and losses incurred during the settlement process of exchange and bank fees, thereby greatly reducing trade costs and increasing trade profits. At the same time, using local currency settlement will to some extent reduce the impact of fluctuations in the US dollar exchange rate, avoid issues such as tight US dollar supply or US sanctions, ensure smooth trade between the two sides, and improve trade convenience and efficiency. Due to not being restricted by the exchange of US dollars, China and Brazil can expand the range of enterprises that both sides can choose in trade, stimulate their trade enthusiasm and increase trade diversity, increase their trade cooperation in various fields such as basic investment and finance, and promote the development of bilateral trade relations towards a more comprehensive direction. For enterprises in specific industries in both countries, conducting trade settlements in local currency will have a more significant positive impact on companies in China's electronics, machinery, and medical industries, as well as agricultural companies in Brazil such as soybeans and corn.

For China, in addition to the positive significance mentioned above, carrying out trade settlement in local currency between China and Brazil will help promote the internationalization of the RMB. As one of China's main trading partners for a long time, China and Brazil have close trade relations and huge transaction volumes. The use of local currency settlement will increase the circulation and use of the RMB in the international market, enhance the international recognition of the RMB, and assist the internationalization process of the RMB.

Wu Lichao pointed out that with the increasing internationalization of the RMB, the scope of its application in foreign trade settlement will be expanded to a certain extent, greatly reducing the exchange rate risk and transaction costs of cross-border trade, and effectively promoting the increase of foreign trade scale. The improvement of the internationalization of the RMB can optimize China's cross-border trade commodity structure, allowing Chinese enterprises to obtain better investment and financing opportunities in the international market, which is conducive to increasing the export of high-tech high-end products, increasing product added value, and accelerating China's transformation and upgrading from exporting primary products to high value-added manufacturing products. Import enterprises will also increase their purchasing power due to the internationalization of the RMB, introduce more advanced equipment, and optimize China's foreign trade structure. With the increasing recognition of the renminbi in the international market, China will establish trade partnerships with a wider range of countries, forming more diversified trade methods and a more stable market structure.

Due to the lack of an effective market exchange rate between the Chinese yuan and the Brazilian real, there may be exchange rate distortion and unfair pricing, which may affect the profitability and financial situation of enterprises. "Wu Lichao specially pointed out that due to the current obstacles faced by China and Brazil in conducting local currency settlement, such as payment settlement and financial information exchange, and the lack of a complete supporting financial infrastructure and service network, Therefore, enterprises may face certain transaction risks when conducting transactions. Meanwhile, due to the fact that the China Brazil Agreement will promote the internationalization of the RMB through settlement in local currency, it may lead to expectations of RMB appreciation, reducing the competitive advantage of Chinese export enterprises in terms of price, and affecting the exports of Chinese enterprises, especially small and medium-sized foreign trade enterprises.

In the face of the above situation, Wu Lichao suggests that in the future, China and Brazil should continue to strengthen bilateral policy communication and exchange, form a more stable and transparent market-oriented exchange rate formation mechanism, and maintain the relative stability of the RMB and Brazilian real exchange rates; Accelerate the construction of bilateral financial cooperation agreements, financial infrastructure, and service networks to improve the efficiency and security of local currency settlement; Adhere to a managed floating exchange rate system and a long-term stable RMB exchange rate strategic plan.