Exclusive: Venezuela and China in talks for currency swap - sources

CARACAS (Reuters) - Venezuela's central bank is in conversations with its Chinese counterpart over a possible currency swap that would allow the South American nation to boost its dwindling international reserves, two sources familiar with the talks told Reuters.

The arrangement, which one source said could total around $3 billion, would provide financing for Venezuela to import Chinese goods or maintain part of its reserves in yuan, leaving more dollar reserves available to meet foreign bond payments amid investor concerns of a potential default.

The sources did not know which side initiated the discussions, which began at least 10 months ago, but said the parties have not reached an agreement.

That is in part because it is not immediately evident how China would benefit from holding bolivars, the Venezuelan currency, one of the sources said.

It was unclear if the two sides were close to reaching a deal, or if the operation would even happen.

Venezuela's central bank did not immediately respond to a request for comment.

An official at the People's Bank of China said she had no information about a possible currency swap. A foreign ministry spokeswoman said China gives high importance to cooperation with Venezuela, but she had no knowledge of the issue.

Bolivars have been under strict capital controls since 2003 and subject to frequent devaluations and a steady depreciation on the black market.

China is already OPEC member Venezuela's top financier via an oil-for-loans program which since 2007 has funneled $50 billion into Venezuelan coffers in exchange for repayment in crude and fuel.

The operation, if carried out, would likely involve Venezuela opening an account at China's central bank with the equivalent of $3 billion in yuan, which would be used to pay Chinese firms for goods and services, one of the sources said.

China would in turn open an account in bolivars of equivalent value to pay for Venezuelan goods and services.

ARGENTINE PRECEDENT

China has carried out swap transactions with dozens of central banks around the world to increase the use of yuan as a global reserve currency and to stimulate bilateral trade.

Argentina last year signed an $11 billion swap deal with China, which has helped it shore up reserves amid an ongoing legal battle with creditors.

That deal allows Argentina to convert the yuan into dollars.

However, Venezuela's exchange rate regime is more cumbersome than in Argentina. There are three official bolivar exchange rates, and greenbacks on the black market fetch more than 100 times the strongest official exchange rate.

While a swap arrangement could conceivably help China obtain more Venezuelan oil, that would not necessarily make sense for China, though, given the current oversupply in crude markets.

Venezuela's foreign reserves have fallen to $14.819 billion, according to the central bank's latest report, the lowest since March of 2003.

The rapid decline -- reserves stood at about $22 billion at the end of 2014 -- has been driven by low oil prices, dysfunctional currency controls, and the falling price of gold - which comprises about 58 percent of reserves.

In October, Venezuela withdrew some $467 million from an International Monetary Fund holding account, according to information posted on the fund's website.

The tumble in Venezuelan foreign reserves has left investors concerned the country may not be able to pay debts, leading bonds to sell at a sizeable discount and leaving its debt yielding about 25 percentage points more than comparable U.S. Treasuries.

Maduro dismisses debt default talk as a right-wing smear campaign promoted by his political adversaries, and notes the Socialist Party has never missed a bond payment. State oil company PDVSA said it has paid $4.2 billion in recent weeks in maturing debt.

Recession-hit Venezuela's economic travails, with the highest inflation in the world and shortages of many basic goods, is weighing heavily on Maduro's ratings ahead of Dec. 6 parliamentary elections the ruling Socialists could lose.

(Additional reporting by Kevin Yao and Megha Rajagopalan in Beijing and Brian Ellsworth in Caracas; Writing by Brian Ellsworth in Caracas; Editing by W Simon)