* Brazil-China proposal for local currency trade political
* Faces obstacles as currencies nonconvertible, illiquid
* Part of broader effort for emerging market assertion
By Ana Nicolaci da Costa
BRASILIA, May 26 (Reuters) - Brazil's and China's plans to use local currencies in some trade transactions have added to speculation that the dollar's days as the world's reserve currency are numbered, but experts say the move is mostly political and faces significant hurdles.
China became Brazil's biggest trading partner in April for the first time, surpassing the United States, with more than $3 billion worth of commerce between them.
With bilateral trade booming, the two members of the so-called BRIC group of emerging nations, which also include Russia and India, were quick to reinforce their economic might by proposing trade in reais and yuan, or renminbi, China's other name for its currency.
At a time when emerging markets are starting to question the preeminence of the dollar, the move took another jab at U.S. economic supremacy after the global financial crisis underscored how dependent the United States is on developing nations to finance its debt burden.
But if Brazil's experience with Argentina is anything to go by, local currency trade with China faces an uphill battle.
"The exporter wants to be paid in a currency with which he can do whatever he wants. If he is paid in local currency, he can only use it in that country to buy the goods and services in that country," said Rubens Ricupero, former Secretary General of the United Nations Conference on Trade and Development.
"It's a completely archaic vision of international trade."
For trade to be conducted by two countries with nonconvertible currencies, central banks would have to get involved to allow exporters to, in the case of Brazil and China, sell in reais as importers buy in yuan. That could mean the central banks end up holding some of the other country's currency in their stock, pushing them into a similar problem as the exporter's: holding a nonconvertible currency.
Even if central banks chose not to hold that currency in stock and exchange it for dollars, as Argentina does, exporters seem to think it is more of a hassle than it's worth.
Indeed, in 2008, only 0.07 percent of Brazil's exports to neighboring Argentina were made in local currency, according to data from Brazil's foreign trade chamber, Camex.
MUSCLE-FLEXING
Even if far-fetched, the idea of local currency trade between major emerging nations shows just how eager developing countries are to make their mark in an increasingly multipolar world.
The proposal is a vote of confidence by Brazil and China in their own currencies and economies, analysts said. It is also part of a bigger effort to increase their standing in multilateral bodies, such as the International Monetary Fund, to reflect their importance in the world economy.
"It's a bit more of a political issue in terms of highlighting the trade linkages between Brazil and China, maybe putting some more pressure on the U.S. and the G7 to give Brazil and China and the BRIC countries in general more say at the IMF, the World Bank," said Douglas Smith, head of emerging markets for the Americas at Standard Chartered Bank in New York.
And Brazil and China are certainly flexing their muscles.
The battle for a permanent seat at the U.N. Security Council and greater say at the IMF have been central to President Luiz Inacio Lula da Silva's foreign policy agenda to reinforce Brazil's role as an emerging global player.
The Chinese, for their part, have been trying to carve out a greater role for their currency, especially as the global financial crisis exposed the vulnerability of the dollar.
Not only have the Chinese proposed moving away from the greenback as the world's reserve currency, but they are diversifying their reserves, have signed yuan swap deals with other central banks and a pilot scheme is soon starting in Hong Kong to settle trade in yuan with selected companies. [ID:nPEK184558].
Consistent with its diversification goal, analysts say local currency trade with Brazil is another Chinese show of force that they are in line to become the next superpower.
Fears that the United States could be stripped of its AAA credit rating have added to the doubts surrounding the dollar, but many experts caution that U.S. power will ensure a long life for the greenback.
"The world's reserve currency is always the currency of the country that basically guarantees peace and stability," said Ricupero, also a former finance minister of Brazil.
"The country that provides the ultimate guarantee, from a strategic point of view, is the United States." (Editing by Kenneth Barry)