By Aurora Lane | 2023-08-22

LA PAZ -- The start of financial operations in Chinese yuan has generated mistrust and criticism in Bolivia, with some economists arguing that the South American country is not yet ready to make a transition to the Chinese currency.

The government's decision is a short-term measure that does not address the underlying causes of the dollar deficit in the Bolivian economy, they warn.

Economist Fernando Molina said he has not yet seen any evidence that Bolivians are using yuan and noted that the currency is not widely traded internationally.

The yuan is not the best option for Bolivia because it is a relatively new currency and its value is volatile at present, he said.

China and Russia have "intentions" in Bolivia, Brazil, Argentina and Venezuela, "which are considered economies that have liquidity problems" and are looking for alternatives to the US dollar, Molina told Entorno.

But these countries are being "short-sighted" in considering the yuan and the Russian ruble as alternatives, he said, as most trade is still conducted in dollars and most debt is recorded in dollars.

Using the yuan will not bring any tangible benefits to Bolivia because the South American country imports significantly more than it exports to China, he said.

The agreement will serve only Beijing's interests in strengthening the Chinese currency, he added.

Using the yuan as an operating currency can increase the economic dependence of countries like Bolivia on China: the countries that adopt the yuan are subject to the monetary and economic policies of the Chinese Communist Party (CCP), economists agree.

Relying on the yuan can make them more vulnerable to fluctuations in its value and limit their ability to make independent decisions about their own economies.

The yuan is also a less transparent currency than the dollar. This opacity makes it difficult for foreign investors and governments to assess the risk of investing in or trading with China.

Bolivia needs dollars

The US dollar is still a crucial currency for the Bolivian economy, international trade, transactions, debt service payments and foreign investment, Molina said.

"The US dollar still has a very important global hegemony," he said. "Almost 70% of central banks have their reserves in US dollars, and at least 75% of international trade is estimated to be conducted in the US dollar."

Bolivia actually needs dollars, said businessman Samuel Doria Medina.

"Bolivia needs dollars and will continue to need them," he said in a social media post, noting that this is one of the problems that the country needs to resolve.

The use of yuan in Bolivia "is not a long-term solution" to the country's economic problems, said financial analyst José Gabriel Espinoza, a professor at Bolivia’s Catholic University.

The move is more likely to be a short-term measure that will "serve [only] to mask the underlying problems", he told the Associated Press.

But Banco Unión, Bolivia's state-owned bank, has started operating in yuan already, Bolivian Minister of Economy Marcelo Montenegro said in late July, adding that efforts are under way to establish a Chinese bank in Bolivia.

'Distraction' from real problems

The Bolivian government began efforts to use the yuan and attract a Chinese bank to Bolivia in response to a severe dollar shortage that began in early 2023 and has yet to be resolved.

During his mid-term report, Bolivian President Luis Arce on May 10 announced his government would begin using the yuan for foreign trade.

Arce did not give many details on what trade would involve the yuan, but transactions with China are the likely candidate.

His announcement followed similar moves by Brazil and Argentina, both of which have begun to use the yuan for foreign trade.

Cecilia Requena, a senator for the opposition political alliance Comunidad Ciudadana, criticized Arce's plan to trade using yuan.

The plan is a "distraction" from the real problems facing Bolivia, she said in an interview with Voice of America, such as the economic crisis and shortage of dollars.

"The yuan is not yet a viable alternative to the dollar as the world's reserve currency," she said. "The yuan is subject to many exchange restrictions that are not transparent and are often determined by politics."

Requena noted the tight control of the CCP over the yuan.

No "sensible person" anywhere would choose to have assets in yuan, she said, absent a special and privileged relationship with the CCP.

The Chinese government has greater control over the yuan than the US government does over the dollar. Beijing's power over its currency raises the risk that the CCP will use the yuan for political or economic purposes, such as devaluing it to increase exports, something it has been accused of several times in the past.

China stands to gain

Bolivia does not meet the conditions to abandon the dollar for the yuan in commercial transactions, financial consultant Jaime Dunn told national newspaper Opinión.

Most of Bolivia's foreign trade income and payments come from markets where deals are made in dollars, he said.

Bolivia has a "negative trade balance with China" and daily activities will continue to be carried out in dollars or with the national currency, he said.

For a currency to have worldwide acceptance, it must be a widely used international exchange medium, Dunn added, noting that the prices of major commodities such as oil, soybeans and gold are quoted in US dollars.

"Obviously there are very important efforts by Russia and China to replace the dollar," Dunn said.

Ultimately, such efforts will benefit only China and Russia, warned financial consultant Fernando Romero, president of the Tarija department's Economists Association.

"Now we are going to have to look for yuan to import instead of dollars," he told Página Siete. "More bolivianos will have to be paid in exchange because the yuan will appreciate."