China plans to set up Yuan pooling scheme to counter dollar dominance
Beijing:
China’s central bank has signed an agreement with the Swiss-based Bank for International Settlements (BIS) as part of Beijing’s plans to establish a yuan pooling scheme starting with Indonesia, Malaysia, Hong Kong, Singapore and Chile to counter the dominance of the US dollar.
The scheme aims to provide participating central banks with liquidity support during future periods of market volatility by creating a reserve pool, according to the People’s Bank of China (PBOC), which signed the agreement with BIS on Saturday.
The establishment of the settlement is conducive to meeting reasonable international demand for the renminbi and will contribute positively to strengthening the regional financial safety net, the apex bank said.
The agreement will initially include central banks in Asia and the Pacific, including Bank Indonesia, the Central Bank of Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore and the Central Bank of Chile, the PBOC said.
The plan comes amid heightened concerns in Beijing over the dominance of the US dollar and global investors’ search for safe havens as the US embarked on monetary normalization to contain high inflation, the Hong Kong-based South China Morning Post reported. Tuesday.
The Renminbi liquidity scheme, which may be used in times of market volatility in the future, initially includes the 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 ($2.2 billion) or the US dollar equivalent, creating a reserve pool with the BIS, according to a statement from the Swiss-based central bank-owned financial institution.
They will also have access to additional funding through a collateralized liquidity window, allowing participating central banks to take out additional loans by using their existing positions as collateral, the Post report said.
Recently, the Chinese renminbi has been more widely used in trade arrangements, international investment and financing, and foreign exchange transactions, more central banks have included it in their foreign exchange reserves and market players have gradually shown greater willingness to use it, state-run China Daily reported.
However, the US Federal Reserve is accelerating the tightening of monetary systems and launched the process of balance sheet reduction in June.
Against this backdrop, the launch of a renminbi liquidity scheme is key to neutralizing potential risks, the Daily report said.
“It could attract more members in the future,” said Ding Shuang, chief economist of Greater China at Standard Chartered Bank.
China has spent years trying to increase the global use of the yuan.
Beijing has signed more than three trillion yuan in bilateral currency swap agreements 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, according to the Post report.
The Chinese authorities have cautiously approached the internationalization of the yuan in the 14th Five-Year Plan for 2021-25, calling it a matter of market choice and a gradual process.
“The announcement shows that the Chinese central bank has made huge efforts to promote the construction of institutional infrastructure. This may be due to the arming of finances in recent years,” he told the Post.
While tensions over Hong Kong’s national security law sparked heated discussions about a potential financial untying between China and the US by 2020, recent Western sanctions against Moscow have served as a special 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.
The yuan’s share of global payments, foreign exchange and reserve assets is still well below the US dollar, but many analysts believe that the war between Russia and Ukraine and the turmoil in markets following aggressive US Federal Reserve rate hikes might give her a chance to get the up.
“Sanctions have disrupted the global financial order… and they will accelerate de-dollarization,” Citic Securities, a leading Chinese investment bank, wrote in its semi-annual outlook last week. Beijing’s plan for internationalization of the yuan could also receive a boost through the Belt and Road Initiative, especially in Asia, the Post report said.
“The yuan initially played the role of an anchor currency in Asia,” Ding Zhijie, head of the State Administration of Foreign Exchange (SAFE) research center, wrote in the June issue of Modern Bankers magazine.
But the SAFE official said the internationalization of the yuan will be complicated and a long-term task.
“In the future, we need to pay more attention to economic connections and strengthen regional monetary and financial cooperation,” he said.
The yuan accounted for 2.14 percent of global payments in April, well below the US dollar’s 41.81 percent.
In terms of its share of global foreign exchange reserves, the yuan was in fifth place at the end of last year with a share of 2.79 percent, compared to 58.5 percent for the US dollar and 20.6 percent for the euro.
The weight of the yuan in the International Monetary Fund’s special drawing rights basket will increase to 12.28 percent on Aug. 1, up 1.36 percentage points from the 2016 assessment, the Post report said.
