"De-dollarization" is in full swing: Argentina's renminbi use is at an all-time high

Argentina has just paid $1 billion in international debt in yuan.

According to CCTV news, on June 30, local time, according to local media reports, Argentina has used the IMF Special Drawing Rights and RMB settlement to repay to the International Monetary Fund (IMF) $2.7 billion of foreign debt due on the same day. This is the first time Argentina has used the renminbi to pay off its external debt.

IMF spokesman Kozak announced on the same day that of the $2.7 billion of maturing debt, $1.7 billion was paid using the IMF's special drawing rights, and the remaining $1 billion was paid in yuan.

Meanwhile, Argentina has used a record amount of renminbi. On June 24, Bloomberg reported that data from Mercado Abierto Electrónico, one of Argentina's largest exchanges, showed that RMB trading in Argentina's foreign exchange market recently hit a single-day record high of 28%, compared with a maximum of 5% in May.

A few days ago, Matthias Thombolini, secretary of state for trade at the Argentine Ministry of Economy, announced that in April and May this year, Argentina's imports settled using RMB were worth 2.721 billion US dollars, accounting for 19% of the country's total imports in these two months.

Argentina's "de-dollarization" process is accelerating.

More than 500 Argentine companies have requested payment for imports in yuan

According to Bloomberg previously reported, the US home appliance giant Whirlpool has difficulty obtaining US dollars in Argentina, coupled with a short pause in production in recent months, the company is considering using yuan to pay for imported parts from the new factory to ensure a stable supply of key electronic components.

Whirlpool is not alone.

Argentina's industrial production relies heavily on imports of intermediate goods and capital goods, and the current predicament is prompting companies to turn their attention to the renminbi.

According to the Argentine customs agency, more than 500 Argentine companies have requested payment for imports in yuan, including manufacturers of electronics, auto parts and textiles, as well as oil and mining companies.

According to Argentina's central bank, officials also approved payments equivalent to $2.9 billion in yuan imports. In the first 10 days of June, the total amount of yuan traded in the Argentine foreign exchange market was about $285 million, twice as much as in May.

Argentina's dilemma: soaring prices and a sharp depreciation of the currency

Argentine companies are increasingly using RMB for foreign trade settlement, a trend that is inseparable from Argentina's severe fiscal difficulties.

In August last year, Argentina was already caught in a "storm", facing soaring prices, a sharp devaluation of the currency, increased social unrest and a political crisis within the government.

As inflation continues to rise, coupled with the sharp appreciation of the US dollar due to the continued interest rate hikes by the Federal Reserve, the Argentine peso is under great depreciation pressure, and the Argentine central bank once sold the dollar every day to prevent the peso from depreciating.

For almost a year, the situation has not been much better.

Reuters has reported that since the beginning of this year, the export of Argentina's cash crops corn and soybeans has been hit by severe drought, causing the country's foreign exchange reserves to fall sharply and inflation to rise to 109%, which in turn threatens Argentina's ability to pay trade and repay debt.

Argentina's currency has depreciated by half over the past 12 months, making it the worst performer among emerging markets over the same period. Argentina's central bank's dollar reserves are at their lowest level since 2016, and their liquid dollar reserves are effectively negative if currency swaps, gold and multilateral financing are excluded.

Analysis: The renminbi represents a quick, short-term solution

Maria Castiglioni, director of Argentine consultancy C&T Asesores, said "the only option is to get renminbi from China's currency swap quota."

Since 2009, China and Argentina have maintained bilateral swap agreements, which are considered an insurance policy to strengthen foreign exchange reserves during liquidity crises.

Bloomberg reports that in Argentina today, the renminbi represents a quick and timely solution to keep assembly lines running as long-term planning is challenged by soaring inflation and policy changes.

As Juan Carlos Puente, president of Whirlpool Latin America, said in an interview:

"We are working hard to figure out how we can use this new flow channel, namely RMB, to allow us to continue importing raw materials."

But it's "not easy" for businesses to change the payment currency, Puente acknowledges.

If Whirlpool moves forward with the plan, it will join Argentine companies such as Miror and Newsan, which paid $630 million worth of imports in yuan between May and August, and are currently lining up to buy yuan, according to the Argentine customs agency, as the central bank requires companies to find financing channels on their own.

"De-dollarization" accelerates

It is worth noting that Brazil, Argentina and other South American countries have begun the process of "de-dollarization".

At the end of March this year, the Brazilian government reportedly said that Brazil had reached an agreement with China to no longer use the US dollar as an intermediate currency, but to trade in its own currency.

In January, Argentina's central bank said it had formally expanded a currency swap agreement, which would strengthen Argentina's already 130 billion yuan of foreign exchange reserves and activate 35 billion yuan of disposable quota, according to the Global Times.

On April 26, Argentina's economy minister, Massa, announced that Argentina would stop using the U.S. dollar to pay for imports from China and instead use the renminbi for settlement.

From Latin America, the "backyard of the United States," to Africa, the Middle East, and then Europe and Asia-Pacific, more and more countries are planning or already implementing "de-dollarization" programs to strengthen local currency settlements in cross-border trade and investment.

According to the Bank for International Settlements (BIS), the share of RMB trading volume increased to 7% in 2022, up from 4% in 2019, making it the world's fifth-largest trading currency after the US dollar, the euro, the Japanese yen and the British pound. According to incomplete statistics, more than 70 central banks or monetary authorities around the world have included RMB in foreign exchange reserves.