Argentina, the Chinese swap and power competition.

In the early 1970s, Argentina joined a group of Latin American countries, including Brazil, Chile, Mexico and Venezuela, that initiated diplomatic relations with the People's Republic of China. The change of course in Argentine foreign policy, which until then had exclusively recognised Taiwan, marked the beginning of a new era in bilateral relations and regionalised a process of opening up to Asia. The trade relationship developed between the 1970s and 2009, culminating in the signing of a swap in July 2009 between the Central Bank of the Republic of Argentina (BCRA) and the People's Bank of China (PBOC). The purpose was to ensure the stability of the South American country's exchange rate and strengthen its trade ties. The relationship between the governments was affected in December 2023 by President Milei's repeated anti-communist statements and his rapprochement with the US. This essay will review how Argentina is in the middle of the disputes between the great powers and their outcome.

History of the Chinese swap and Argentina

The first swap between the BCRA and the PBOC was signed in 2009, during the presidency of Cristina Fernández, was for an amount of approximately CNY 70 MM/ ARS 38 MM (USD 10.2 MM), with a term of three years. Argentina never activated the original agreement. It was modified in 2014 for USD 11 billion with identical terms during the administration of Axel Kicillof at the Ministry of Economy and Juan Carlos Fábrega at the BCRA. The agreement consisted of the BCRA being able to request disbursements of up to CNY 70 billion from the PBOC and deposit the equivalent in pesos, with a term of up to 12 months. The difference between the two was the improvement in the conditions of use: more flexible terms, reduced costs and the authorisation of additional uses.

The following year, a supplementary agreement was signed allowing the five BCRA swap operations to convert up to CNY 20 billion of the swap line to USD and not only to Argentine pesos. It was renewed and extended in 2015 with an increase to a total of USD 16 billion, with a term of 3 years. In 2017 the amount renewed was ARS 175 MM, equivalent to CNY 70 MM, for a term of 3 years, maturing in 2020.

Both central banks in 2018 signed a supplementary agreement to the 2017 CNY 60 billion currency swap agreement, which included the requirement that Argentina maintain an IMF arrangement in place. This consisted of removing capital controls, modernising monetary policy, resolving disputes with bondholders, returning to capital markets and realigning tariffs. The aggregate of the agreements amounts to CNY 130 billion (USD 18.5 billion) and renewed in 2020 without the requirement to maintain an IMF arrangement.

In 2023, when the third year of the 2020 agreement expired, the president of the BCRA, Miguel Angel Pesce, signed the early renewal of the SWAP for CNY 130 billion (USD 18.5 billion) for three more years, and the request was extended by an additional CNY 35 billion (USD 5 billion). During the election campaign, the newly elected President Javier Milei declared during the election campaign that he would not enter into "pacts with communists", referring to China, and announced that, once elected, he would align himself on foreign trade with the USA, Israel, the European Union and the "free world". Thus, in December 2023, he did not renew the ambassador whose term had expired and did not name a new one, leaving the embassy with a junior official.

Luis Caputo, Minister of Economy since December 2023, given the balance of payments problems, expressed to Milei the need to renew the Chinese swap. Milei agreed and sent a formal letter to Xi Jinping requesting the renewal for USD 5 billion. Beijing made the agreement conditional on direct contact between the two leaders. While Foreign Minister Diana Mondino managed the contact, relations cooled because Argentina opted for a US offer to buy fighter jets instead of the Chinese ones already agreed. Beijing interpreted Milei and Mondino as damaging bilateral ties, especially after the Argentine ambassador, Sabino Vaca Narvaja, was replaced without warning.

China is an important trading partner. The terms of swaps and other financial agreements tighten the bond between the two countries. The growing trade relationship between Argentina and China raises concerns both in Washington and among Milei's supporters in Buenos Aires. The cancellation of the swap implies a reduction in the BCRA's net international reserves. This means that the central bank will have less room for manoeuvre to face external shocks and maintain the exchange rate from 2026 onwards unless it replaces it with a similar agreement with another central bank. This cancellation also signals a significant shift in Argentina's foreign policy, aligning more closely with the US and the 'free world ', and potentially impacting its economic relations with China. However, it's important to note that such a shift could also open up new trade opportunities with the US and other Western countries.

Swap and infrastructure works

The swap has been a crucial part of the agreements between Argentina and China, guaranteeing economic cooperation projects, such as the construction of infrastructure for the Latin American country, mainly the Néstor Kirchner dam, located 185 km from the mouth of the Santa Cruz River, and the Jorge Cepernic dam, 250 km from the same site. These are China's most significant renewable energy projects outside its territory, with an initial budget of USD 4.7 billion. The Chinese swap has not only bolstered Argentina's economy but also facilitated the implementation of these key infrastructure projects.

After Milei became president, the Argentines halted the construction of the dams. The resolution of the conflict came with the mission in charge of refinancing the USD 5 billion tranche of the Chinese swap, of Minister of Foreign Affairs Mondino to Beijing together with Minister Caputo, Pablo Quirno, Secretary of Finance, and Santiago Bausili, head of the BCRA in April 2024. In June, the swap was renewed on condition of a gradual reduction of the amount owed, as more than USD 2.9 billion was due in June and a further USD 1.9 billion was due in July. The BCRA should pay the commitments next year, 2025, and settle them in mid-2026.

The renewal of the swap is on condition that the additional USD 5 billion is paid in 2026 without renewal, thus tightening the swap in response to Milei's diatribe. The BCRA will have to generate the dollars needed to meet this commitment and replace the PBOC credit. In the same mission, nearly USD 1 billion was obtained to reactivate the construction of works in Santa Cruz, based on consortiums of banks composed of China Development, Bank Corporation, Industrial and Commercial Bank of China (ICBC) and Bank Of China. Accompanying the April mission was an executive from UTE (Unión Transitoria de Empresas), made up of China Gezhouba Group International (54%) and Eling Energía Argentina (ex-Electroingeniería) (36%), in charge of the two hydroelectric power plants on the Santa Cruz River. Hidrocuyo holds the remaining 10%. Gezhouba abandoned the dam project because it did not receive a response from the president to sign the contracts.

Business relations

The relationship between these two countries stands out for its high level of trade. In 2022, China was the second destination for Argentina's exports and the first for its imports. In addition, the Asian country is among the country's main investors.

President Javier Milei has sought to improve relations with the United States, fourth trade partner, which is why he has ignored essential responsibilities with the Asian giant (dams), as he portrays the former as his strategic ally. Argentina is in the middle of a trade dispute between the US and China, as the country has important lithium deposits, access to Antarctica for oil extraction, and the Strait of Magellan, an alternative route to the Panama Canal.

The dispute over lithium

In 2023, China was the main destination for lithium carbonate exports, with 44.59% of a total of USD 807.1 million. In addition, there are both US and Chinese companies in the provinces of Jujuy, Salta, and Catamarca, as well as Canadian, French, German, Korean and others.

Chinese mining companies reached agreements for the industrialisation of lithium with the regional Governments in the country. While the Asian giant has its sights set on Argentina, the US also has its sights set on Argentina but has not reached any agreement in any region, so a struggle for white gold is emerging. Due to its use in the manufacture of batteries for energy storage and electric cars, it has become an essential material for the development of clean technologies.

As the world leader in lithium battery production and refining, China has a dominant strategic position in the global industry. Meanwhile, the US, aware of the need to diversify its sources and avoid relying exclusively on China for critical technologies such as lithium batteries, is stepping up its investments in South America. This move seeks to counterbalance China's growing influence in the region.

Despite Milei's rhetoric, China is quietly expanding its presence in numerous lithium projects in Argentina, strengthening its role as a key regional commercial and financial partner. Despite Milei's opposition to China's 'socialist policies', his government has maintained stable diplomatic relations with the Asian Dragon.

To conclude, although US-Argentina relations are increasingly visible today, Argentina has a long and significant trade history with China. Since the beginning of their diplomatic relationship in the 1970s, they have developed a close economic partnership consolidated over time. Trade agreements, such as the currency swaps and infrastructure investments, have strengthened this partnership in recent decades. The Asian country emerged as Argentina's main trading partner, especially in the area of agricultural and mineral exports. At the same time, the gauchos serve as an important market and strategic partner in Latin America. In sum, despite recent moves towards greater cooperation with the United States, the trade link with China is a fundamental pillar for the Argentine economy. It reflects a difficult to break deep interdependence and long-term commitment between the two countries.