Great Graphic: China-Brazil Tie-Up

This Great Graphic is from Thomson Reuters. It shows China-Brazil trade, the modest Brazilian surplus and a look at the large categories of Brazilian exports to China. 

The bulk of the goods Brazil sends to China are raw materials.  China will use some of those raw material to manufacture goods and later try to sell those good back to Brazil.  This is true not only of Brazil but many other developing countries as well.  

The idea that other emerging markets and China are in a complimentary position may be true for only a brief period.  Higher wage growth in China (nominal plus inflation) will encourage PRC producers to move up the value-added chain.  Already, the Boston Consulting Group estimates that real unit labor costs in China are already above Mexico's.

 

One dimension of the issue that is being discussed in the foreign exchange market is the renewed commitment to use each their own currencies to settle trade coming from the fifth BRICS (includes South Africa) summit.  China and Brazil have agreed on a bilateral currency swap line of CNY190 bln and BRL60 bln (~$30 bln).  This swap line is unlikely to be used to pay for trade, though that is how some are presenting it.  The line is to be used if and when a financial crisis disrupts the ability to pay for imports.   

China has struck bilateral swap deals with many countries, and not just in Asia.  However, it does not appear that swap lines have been utilized, making it a nebulous piece of evidence of the yuan's internationalization.  Most of the commodities China imports from Brazil are priced and invoiced in US dollars.  If Brazil, for example, would accept yuan for soya, then it will bear the exchange rate risk.  What would be more significant and more disruptive is if China would become a supplier of dollars by offering to swap some of its vast Treasury holdings.