Argentina-China a vital link in future of Argentine agriculture.

ARGENTINA- VITAL RELATIONSHIP WITH CHINA.

China and Argentina have agreed a 70 billion yuan (10.2 billion dollars) currency swap so that Argentina can pay for Chinese imports in yuan, a top Chinese official and the Xinhua news agency said yesterday.

The sources explained that the bilateral accord, co-signed between the Central Bank and its Chinese counter-part China’s Popular Bank, aims "to guarantee access by Argentina to an international currency if there should be a lack of suitable means of payment (iliquidity)."

In a currency swap, each participating party gains access to the other’s currency and pays for it with the equivalent amount in its own currency. In this case Argentina would potentially be able to raise 70 billion yuan in exchange for an equivalent sum in pesos (up to roughly 37 billion pesos).

The additional 10.2 billion dollars would seek to reinforce the financial stability of Argentina, as the peso has been weakened in recent months as a result of the global economic crisis and the government’s conflict with the farmers over soybean export duties.

The swap was signed in Medellín, Colombia, on the sidelines of the annual meeting of the Inter-American Development Bank, which is being attended by Zhou Xiaochuan, governor of the People’s Bank of China.

Zhou said the two countries had agreed to an initial memorandum, but both sides needed to work out final details.

"We signed a memorandum on the framework. Both sides still need to go through domestic procedures to finalize that," he told reporters at the IADB meeting. "It is a pretty new thing, we should take time to consider how well we can do that and how far we can go."

Thanks to the swap, Argentina will not have to pay for imports from China in dollars, the currency in which most international trade is settled, Xinhua said.

"The deal will help stabilize the regional monetary system, guard against financial risks and limit the spread of the crisis at this key moment when it is broadening day by day," the agency said, paraphrasing the official Chinese reasoning behind the agreement.

The swap is the sixth that the PBOC has signed with central banks since December in a drive to free up trade-finance channels that have been clogged by the global credit crunch.

The World Bank reckons the shortfall in global trade finance could be as high as 300 billion dollars.

The problem will be on the agenda when leaders of the group of 20 rich and emerging economies, which include Argentina and China, meet in London on Thursday to tackle the global economic crisis.

China has previously struck swap deals with Malaysia, South Korea, Hong Kong, Belarus and Indonesia.

By generating goodwill and promoting the international use of the yuan, the deals also serve Beijing’s long-term political interests, economists say.

Huang Zhilong, a researcher with the Chinese Academy of Social Sciences in Beijing, said the swap set a good example for other Latin American countries to follow.

"Since Argentina has done this, why can’t other countries like Brazil and Venezuela?" said Huang, who studies Latin American finances. "It’s a big deal that will increase China’s financial presence in Latin America."