Brazil, China Plan to Trade Without Dollars Is ‘Pure Idle Talk’

By Fabiola Moura
May 21 (Bloomberg) -- China and Brazil’s proposal to abandon the dollar for bilateral trade and use yuan and reais instead is “pure idle talk,” former Brazilian central bank President Gustavo Franco said.
“Replacing the dollar as an invoicing currency for something else doesn’t make a lot of sense,” Franco, the chief economist at Rio de Janeiro-based Rio Bravo Investimentos, who led the central bank from 1997 to 1999, said in an interview in New York yesterday. “It is idle talk. Pure idle talk.”
Brazilian President Luiz Inacio Lula da Silva and his Chinese counterpart Hu Jintao discussed the plan to settle trade in local currency during Lula’s three-day state visit to China this week. The two countries signed 13 accords during the visit.
China, the world’s third-biggest economy, became Brazil’s leading trade partner this year after the global recession choked sales to the U.S.
“It is not going to succeed,” Guilherme da Nobrega, chief economist at Itau Securities, the Sao Paulo-based brokerage arm of Latin America’s largest bank, said in an interview in New York. “If you let people choose in which currency they want to trade, they want to trade in dollars.”
A spokeswoman for Brazil’s Finance Ministry declined to comment.
China is seeking to promote the yuan as an international currency after signing 650 billion yuan ($95 billion) in swap agreements with Argentina, Indonesia, South Korea, Hong Kong, Malaysia and Belarus since December.
Not Convertible
Shi Lei, an analyst at Bank of China Ltd., the nation’s largest foreign-currency trader, said this week that the proposal may take a couple of years because China’s currency isn’t convertible.
Brazil’s real also isn’t convertible, which makes the plan unlikely even though trade in local currencies is viable, said Ilan Goldfajn, chief economist at Sao Paulo-based Banco Itau BBA SA.
“I am skeptical,” Goldfajn, a former Brazilian central bank director, said in an interview in New York.
Brazil and Argentina, the two biggest South American economies, agreed in September to trade in local currencies, dropping the dollar. The move was an attempt to reduce transaction costs by eliminating fees on currency exchange and “until now it hasn’t worked,” Goldfajn said.
Last month, the two South American nations traded $22.6 million in local currency of the more than $1.6 billion trade flow, according to figures by the Brazilian central bank and trade ministry.
Additional Costs
Brazilian exporters don’t necessarily import from China and would incur additional costs to convert yuan revenues into dollars, said Franco, who helped craft the real currency plan that tamed hyperinflation in 1994.
The trade proposal also would have “lots of restrictions from market practices and regulations,” Nobrega said. “It is very hard to settle international transactions when a currency is not commonly used.”
Chinese and Brazilian leaders may be discussing the proposal because “in the absence of good ideas, you come up with ideas that are not important,” Franco said.
Goldfajn added: “There are more relevant things to be negotiated.”