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China-Brazil Trade Pact May Escalate De-dollarization

Updated: Apr 27, 2023

To diversify their currency reserves and reduce costs and exposure to the US dollar, the Brazilian government has agreed to trade in their own currencies with China.

The Brazil-China trade pact, according to the People's Bank of China, will facilitate commerce and investment between the two nations and increase the usage of the yuan for cross-border transactions between enterprises and financial institutions. Direct trade between China and Brazil will take place through the conversion of yuan to reais and vice versa.

Given that China is the source of more than a fifth of all Brazilian imports, the impact of China and Brazil's efforts to de-dollarize is substantial. Brazil exports 31% of its goods to China. They now have access to direct trade and financial activities. Brazil's largest trading partner is China, with record-breaking bilateral trade in 2017 of $150.5 billion dollars.

For many years, the US dollar has dominated global trade and capital movements. To lessen their reliance on US currency and avoid sanctions in the form of foreign exchange seizures by the US government, many nations are seeking for substitutes. Since the US and other Western nations placed sanctions against Russia due to the Russia-Ukraine crisis in 2022, this trend has escalated.

For instance, the UAE and India are debating the use of rupees for commodities trade, while Saudi Arabia and the UAE are now open to dealing in currencies other than the dollar to sell oil, including in the yuan. Brazil and Argentina have also explored the creation of a unified currency for South America.

Due to the significant dollar reserves held by major central banks throughout the world, it seems doubtful that the US currency would lose its leading position despite the vigorous pursuit of de-dollarization. Yet, a move away from the dollar can already be seen in central banks' increasing gold purchases, which serve to lessen their reliance on the dollar and America's divisive policies of greed.

The Brazil-China trade deal can have a number of political and economic effects, but one of its most important advantages is that it may bring financial gains to both. They can lessen exposure to exchange rate risks by reducing their reliance on the dollar and diversifying currency reserves. This could improve the stability of their economies and balance of payments.

They are more susceptible to changes in the exchange rate between the dollar and its own currency when they depend substantially on the dollar. This may produce financial instability and fluctuation in the balance of payments.

The improved influence over monetary policy could be a crucial financial advantage of their new deal. China and Brazil are no longer prepared to have little control over their own monetary policies and remain significantly reliant on the US currency. This is due to the fact that changes in US monetary policy have had a considerable effect on their international financial systems.

Under the new agreement, the two trading partners are expected to lower their expenses and strengthen financial position by diversifying currency reserves and lowering reliance on the dollar. The agreement to debase the dollar will help their enterprises and financial institutions to foster more growth and prosperity, provide greater flexibility in international trade, and lessen vulnerability to shocks from the global economy.


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