UPDATE 3-China, Argentina sign 70 bln yuan currency swap

(Updates sourcing in lead, adds comment from source at Argentina's central bank)

BEIJING, March 30 - China and Argentina have agreed to a 70 billion yuan ($10.2 billion) currency swap, a top Chinese official and an Argentine central bank source said on Monday.

China's Xinhua news agency said the swap would allow Argentina to pay for Chinese imports in yuan instead of dollars, the currency in which most international trade is settled. But the source at the Argentine central bank described it as helping to shore up the South American country's financial position.

The swap was signed in Medellin, 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."

"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 Argentine central bank source likened the preliminary accord to bilateral agreements between the U.S. Federal Reserve and the European Central Bank, and the Fed and Brazil's central bank, saying it was more of a contingency plan in case the country faced a liquidity crunch.

"Everything points to the notion that the yuan is one of the currencies gaining strength in foreign exchange markets and that it will enjoy greater liquidity on international markets," the central bank source said.

"In (Argentina's) case, the possibility of getting access to a significant sum of yuans, by handing over pesos in exchange, will help strengthen our financial position in practice," the source added.

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. For more details see ID:nLJ605500

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.

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."