China and Argentina have announced an increase in their currency swap deal to 47 billion yuan (equivalent to $6.5 billion) from the initial $5 billion agreed earlier this year.
The extension was signed after the meeting of Central Bank head Miguel Pesce and his Chinese counterpart, Pan Gongsheng, on Wednesday morning.
"We just finished a very good meeting with President Xi Jinping. We raised our problems with him, and once again, the Chinese government heeded our requests and gave us very important help," said Argentine President Alberto Fernandez in an interview with Radio 10 in China.
"We asked for 5 billion dollars, and they gave us 6.5 billion, which is a great relief for Argentina since those are reserves that will now enter the country."
Economist Pedro Gante noted that Argentina had almost depleted its $5 billion swap line with China, with less than $1 billion remaining. This is why activating the second tranche of the currency swap line is essential.
"The first tranche of the swap was key in maintaining imports and even complying with the International Monetary Fund (IMF) during the first half of the year," Gante said.
A currency swap is a financial agreement between two central banks to exchange currencies at a predetermined exchange rate, with a promise to repay each other later, typically with interest.
Argentina's currency swap deal with China will help it replenish foreign exchange reserves, prop up the plummeting peso, and pay for imports. This is crucial as the country faces an economic crisis with inflation at 138 percent and dollar reserves in negative territory.
The recent deal marks the fourth time Argentina has tapped the Chinese central bank for financial assistance and the second swap line during Fernandez's presidency.
A leading candidate in the upcoming presidential election, Javier Milei, advocates dollarization, even though Argentina and many other countries have been distancing themselves from the greenback.
Sebastián Menescaldi, an economist at the consultancy firm Eco Go, cautioned that while activating the new currency swap deal is positive news, the money must be eventually repaid. It will create additional financial obligations for Argentina next year.
De-dollarization trend
Argentina's growing reliance on the yuan reflects a broader de-dollarization trend as some countries seek to reduce their dependence on the U.S. dollar.
Other South American countries, such as Brazil, have also turned to the yuan. Egypt issued its first yuan-denominated panda bonds a few days ago. Russia has also been using the yuan to settle more trade transactions.
This aligns with China's mission to boost the global use of the yuan as a challenger to the dollar. So far, Beijing has entered into multiple currency swap agreements in recent years.
In addition to the increased use of the yuan, there has been talk of the BRICS nations developing a new currency to rival the U.S. dollar as the global reserve standard. However, this plan has yet to progress beyond discussions at the BRICS summit in August.
Meanwhile, ASEAN members have signed an agreement to promote better regional payment connectivity and the use of local currency transactions (LCT) as a continuation of the de-dollarization trend in the region.
ASEAN countries seek to reduce reliance on the U.S. dollar due to concerns about U.S. sanctions, which involve freezing foreign reserves and limiting SWIFT network access. They aim to diversify their reserve currencies and guard against future U.S. currency-based actions.
Last month, Indonesia launched a national de-dollarization task force to promote local currency transactions across borders. This task force will work on policy adjustments in financial markets and trade regulations to encourage banks and institutions to increase their involvement with regional currencies.