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Foreign Exchange

Renminbi poised to capture greater share of Latam financing

The Chinese currency will play a massively enlarged role in trade finance and government reserves in Latin America, a number of leading independent experts have told Emerging Markets, a sister publication of Euromoney FXNews.

Brazil looks set to be the first country in the region to use the renminbi on a significant scale, said Charles Tang, head of the Brazil-China Chamber of Commerce. He added that the inclusion of the renminbi within Brazil’s reserves “is something that is going to happen”. While renminbi usage is still small globally, there is growing interest in Latin America and wider internationally to use the renminbi, according to Weijiang Lin, an assistant general manager at the Bank of China.

The renminbi accounts for 6% of the bank’s international trade settlements, but Weijiang said it was “increasing in importance every year”, adding: “We believe that the renminbi will not only be used in trade, but be included in reserves.”

The possibility of using renminbi will increase as trade with China’s continues to grow. China is now the leading trading partner of Brazil, Chile and Peru and is making strong in smaller countries, such as Costa Rica.

Chinese companies are also investing strongly in other countries. Transactions include a mining deal in Ecuador, the country’s first large-scale mining project, and finance for a new $12 billion oil refinery.

China has billions of dollars in loans to state oil enterprises in Brazil and Venezuela. Use of the renminbi could be attractive for these kinds of deals.

But Kevin Gallagher, an economist at Boston University who recently wrote a report on Chinese banks in the region, was cautious about the renminbi’s role as a Sino-Latin trading currency in the near-term.

He highlighted technical hurdles with the China Development Bank’s reported push to use the currency for trade and investment purposes between Bric nations, as well as the “pre-eminence” of the dollar.

Chilean Central Bank Governor Rodrigo Vergara said that while China was that use of the renminbi was a possibility, trade settlements were predominantly done in dollars. He said Chile had been investing “small amounts of international reserves in the renminbi. We still see the dollar as the strongest currency.”

Lu said she also expects that there to be increasing interest in Latin American companies issuing renminbi bonds, following a growing list of international companies, most from Asia. The renminbi bonds in Hong Kong are known as dim sum bonds, because they are small. “They are called dim sum because they are small, like a snack,” said Lu.

The only renminbi bond from the region was a $159 million bond issued early this year by Mexican telecom giant America Movil.

Mexican Deputy Finance Secretary Gerardo Rodriguez said the use of the renminbi, including the issuance of bonds, was a “natural process that responds to the capital openness and development of the bond market in Hong. The number of transaction will increase as the process matures.”

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