Argentina is currently facing serious economic problems. Due to skyrocketing prices due to the indiscriminate issuance of money, Milley promised to cut sectors and public works projects during the campaign, and intended to abolish the Argentine peso and replace it with dollars. Now, however, he has announced that Argentina will depreciate by more than 50 percent, raising doubts about his policies.
Argentina's inflation problem has been difficult to solve, and the depreciation could exacerbate it further. Milley's vision is to solve inflation by completely replacing the peso with the dollar and reduce price increases in Argentina to a level comparable to that of the United States. However, Argentina does not have enough dollar reserves to achieve this. In the case of selling pesos in the market and buying dollars, the value of the peso will fall, and the exchange rate will inevitably **. This supply-demand imbalance will only exacerbate the inflation problem.
After the news of Argentina's devaluation went viral, there were fears that the currency swap agreement signed between China and Argentina would suffer significant losses. However, such concerns are unwarranted.
Currency swaps are essentially a mutual borrowing relationship, and Argentina** can obtain RMB by applying for a loan from the People's Bank of China. Argentina will return the borrowed yuan to China at maturity with interest. This is similar to an ordinary person or business applying for a loan from a bank to buy a house, borrowing RMB, and finally returning it to the bank in RMB, and paying interest. For China's central bank, such a lending relationship will not lose money.
Moreover, there is a huge difference between the total amount of currency swap agreements actually signed and the amount of borrowing actually used. At present, China has signed more than 4 trillion yuan of ** swap agreements with ** banks or monetary authorities in more than 40 countries or regions, but as of the end of September this year, the actual amount of RMB borrowings used was only 117.1 billion yuan, accounting for less than 3%. Even for China, the actual amount of use is very low, with only 34.3 billion yuan borrowed from abroad as of the end of September this year. In contrast, the amount of the agreement signed far exceeds the actual amount borrowed.
Why would countries be keen to sign currency swap agreements but not actively implement them?This is because currency swaps are essentially temporary financing arrangements that require interest payments rather than cost-free behavior. For countries with a shortage of foreign exchange, currency swaps can easily borrow foreign exchange to meet the needs of national economic development. But the borrower needs to pay interest and needs to carefully consider the real need and solvency of the borrowing.
For China, since there is no shortage of foreign exchange, it is enough to lend some funds symbolically to meet the needs of the other party, without being overly involved in borrowing. Such an approach would reduce risk and avoid increasing the country's indebtedness.
In general, the depreciation of the Argentine peso does not cause significant losses to the currency swap agreement between China and Argentina. Currency swaps are essentially a borrowing relationship, and borrowing from the PBOC requires interest payments and careful consideration of the real need for borrowing and the ability to repay debts. The total amount of the signed agreement is often much more than the amount actually lent.
Argentina is currently facing serious economic problems, and the depreciation could exacerbate inflation and hinder the recovery of the Argentine economy. Milley's policy has not yet been implemented, and we don't yet know what the final effect will be. As individuals, we can follow the economic trends in Argentina and understand the risks and opportunities. For China, it will continue to uphold a cautious attitude and make rational use of currency swap tools to ensure the country's interests and stable development.