With Currency Swap, Argentina Becomes Dependent on China

Earlier this month, Argentina received $400 million from the People’s Bank of China as the fourth installment of an $11 billion currency swap agreement with China. In an email interview, Eduardo Daniel Oviedo, professor of political science and international relations at the National University of Rosario in Argentina, discussed Argentina’s relations with China.

WPR: What are the main areas of cooperation between China and Argentina, and what are the areas of contention?

Eduardo Daniel Oviedo: Politics, trade, investment and migration are the main areas of cooperation between China and Argentina. Mutual support on the issues of the Falkland Islands—known in Argentina as the Malvinas—and Taiwan; a strategic defense alliance; growing trade and investment; and the number of Chinese citizens living in Argentina are examples of the progress in the bilateral relationship.

However, there are also issues preventing closer bilateral ties. The center-periphery model—characterized by exports of soybeans and other raw materials from Argentina and imports of Chinese manufactured goods—weakens Argentina’s manufacturing sector. The question of human rights in China is also incongruous with the policies of Argentine President Cristina Fernandez de Kirchner and has affected Argentina’s modernization program. Chinese immigration to Argentina has grown rapidly in recent years—the Chinese are the fourth-largest immigrant group in Argentina—but the illegal status of many Chinese immigrants, together with their growing influence, has prompted some backlash.

WPR: How important have the currency swap deals between China and Argentina been for Argentina’s economy?

Oviedo: Faced with its partial isolation from the international financial system, Argentina has used the currency swap with China as a means to stabilize the exchange rate until the end of Fernandez’s term in December 2015. The paradox is that, while Argentina is a food producer that benefited from the recent rise in commodity prices, and China is a growing importer of food, between 2008-2014 Argentina has had a $24 billion trade deficit with China. Over that period, Argentina’s Central Bank reserves decreased by $18 billion.

In short, the trade deficit with China has contributed significantly to Argentina’s dwindling international reserves, causing the devaluation of the Argentine peso. And while the currency swap agreement has stabilized the peso, it has come at the cost of increasing Argentina’s dependence on Chinese capital. If the trade deficit with China continues—it reached $5.8 billion last year—the instability of the Argentine peso will continue, as will dependency on China.

WPR: How important has Chinese investment been to expanding and improving Argentina’s infrastructure?

Oviedo: The Argentine government considers China a key economic partner for the development of infrastructure projects such as the construction of two hydroelectric power plants in Santa Cruz province and the rehabilitation of the national railway network, as well as other mining, renewable energy and hydrocarbon initiatives. These projects take the form of foreign direct investment; the transfer of assets abroad, including Chinese firm COFCO buying the Nidera grain company; tax havens; and public bidding or direct purchases by the government.

In fact, government purchases are included in Article 5 of the Framework Agreement for Economic and Investment Cooperation signed during Chinese President Xi Jinping’s visit to Argentina in July 2014. The agreement has been passed by the lower house of the Argentine National Congress and is awaiting the approval of the upper house, but several members have expressed their opposition. In particular, they oppose terms of the agreement granting exclusive benefits to China and eliminating public bidding requirements, along with its lack of technology transfers.
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