China’s yuan liquidity reserve pool highlights efforts to loosen US dollar hegemony
- China’s
plan to establish a yuan liquidity reserve pool with the Bank for
International Settlements (BIS) could help boost international use of
the currency
- The
announcement highlights the effort China’s central bank has been making
to put in place infrastructure that will help loosen the grip of dollar
hegemony
Frank Tang
in Beijing
28 Jun, 2022
China’s plan to establish a yuan pooling scheme with the Bank for International Settlements (BIS), plus Indonesia, Malaysia, Hong Kong, Singapore and Chile could pave the way for the currency to play an anchoring role in the Asia-Pacific region, analysts said.
The plan comes amid heightened worry in Beijing about US dollar hegemony and as global investors search for safe harbours while the US embarks on monetary normalisation to tame high inflation.
The
Renminbi Liquidity Arrangement, which could be used in periods of
market volatility in the future, initially includes the People’s Bank of
China (PBOC), the Bank Indonesia, the Central Bank of Malaysia, the
Hong Kong Monetary Authority, the Monetary Authority of Singapore and
the Central Bank of Chile.
Each
participant will contribute a minimum of 15 billion yuan (US$2.2
billion) or the equivalent in US dollars, creating a reserve pool at the
BIS, according to a statement from the Switzerland-based financial
institution owned by central banks.
China’s push to loosen US dollar dominance takes on new urgency
They will also have access to additional funding through a collateralised liquidity window, which allows participating central banks to make additional borrowing using their existing holdings as collateral. The PBOC said the arrangement will help meet reasonable international demand for the yuan and contribute to regional financial security. “It could draw more members to join in the future,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank.
China’s push to loosen US dollar dominance takes on new urgency
They will also have access to additional funding through a collateralised liquidity window, which allows participating central banks to make additional borrowing using their existing holdings as collateral. The PBOC said the arrangement will help meet reasonable international demand for the yuan and contribute to regional financial security. “It could draw more members to join in the future,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank.
China
has for years sought to increase global use of the yuan. Beijing has
signed more than 3 trillion yuan worth of bilateral currency swap deals
with more than 40 countries, including 400 billion yuan each with Hong
Kong and South Korea, 350 billion yuan each with the Bank of England and
the European Central Bank, 300 billion yuan with Singapore and 150
billion yuan with Russia. This could be due to the weaponisation of
finance in recent years
Ding Shuang Chinese authorities took a prudent
approach to yuan internationalisation in the 14th five-year plan for
2021-25, calling it a matter of market choice and a gradual process.
“Sanctions have disrupted the global financial order … and they will accelerate de-dollarisation,” Citic Securities, a leading Chinese investment bank, wrote in its midyear outlook last week. Beijing’s plan for yuan internationalisation may also get a push through the Belt and Road Initiative, especially within Asia.
“The yuan has initially played the role of an anchor currency in Asia,” Ding Zhijie, head of the State Administration of Foreign Exchange’s (SAFE) research centre, wrote in the June issue of Modern Bankersmagazine. But the SAFE official said yuan internationalisation will be complicated and a long-term task.
“The
announcement shows that the Chinese central bank has been making a huge
effort to promote the construction of institutional infrastructure,”
said Ding.“This could be due to the weaponisation of finance in recent
years.” While tension over the Hong Kong national security law triggered
heated discussions over potential China-US financial decoupling in
2020, recent Western sanctions on Moscow have served as a particular
wake-up call for Beijing, including the exclusion of major Russian banks
from the Swift messaging system and freezing the assets of the Russian
central bank.
Financial regulators have strengthened the home-grown Cross-Border Interbank Payment System – a Swift alternative – and are exploring cross-border use of the digital yuan and increasing use of the Chinese currency in trade settlement and outbound investment. The share of the yuan in global payments, forex transactions and reserve assets is still far behind the US dollar, but many analysts believe the Russia-Ukraine war and market turmoil following the US Federal Reserve’s aggressive rate hikes could give it a chance to catch-up.
Financial regulators have strengthened the home-grown Cross-Border Interbank Payment System – a Swift alternative – and are exploring cross-border use of the digital yuan and increasing use of the Chinese currency in trade settlement and outbound investment. The share of the yuan in global payments, forex transactions and reserve assets is still far behind the US dollar, but many analysts believe the Russia-Ukraine war and market turmoil following the US Federal Reserve’s aggressive rate hikes could give it a chance to catch-up.
“Sanctions have disrupted the global financial order … and they will accelerate de-dollarisation,” Citic Securities, a leading Chinese investment bank, wrote in its midyear outlook last week. Beijing’s plan for yuan internationalisation may also get a push through the Belt and Road Initiative, especially within Asia.
“The yuan has initially played the role of an anchor currency in Asia,” Ding Zhijie, head of the State Administration of Foreign Exchange’s (SAFE) research centre, wrote in the June issue of Modern Bankersmagazine. But the SAFE official said yuan internationalisation will be complicated and a long-term task.
“In
the future we should pay more attention to economic connections and
enhance regional monetary and financial cooperation,” he said.
The yuan accounted for 2.14 per cent of global payments in April, far below the 41.81 per cent commanded by the US dollar.
In
terms of its proportion of global foreign exchange reserves, the yuan
ranked fifth at the end of last year with a 2.79 per cent share,
compared to the 58.5 per cent for the US dollar and 20.6 per cent for
the euro. The yuan’s weight in the International Monetary Fund’s special
drawing rights basket will be raised to 12.28 per cent on August 1, an
increase of 1.36 percentage points from the 2016 assessment.