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Over the weekend, China’s central bank said it will create a yuan liquidity reserve pool in collaboration with the Bank for International Settlements (BIS) and five other regulators to provide a currency anchor in the Asia-Pacific region.
Beijing is working with BIS, Indonesia, Malaysia, Hong Kong, Singapore and Chile for the liquidity reserve pool, and each entity will contribute a minimum of 15 bn yuan ($2.2 bn). The funds will be managed by BIS, and the Renminbi Liquidity Arrangement will provide a safety net in times of market volatility in the future.
Functions of the yuan liquidity reserve pool
“When in need of liquidity, participating central banks would not only be able to draw down on their contributions, but would also gain access to additional funding through a collateralised liquidity window,” said a statement by the People’s Bank of China.
The plan for a yuan liquidity reserve comes at a time when Beijing is worried about the US dollar’s dominance and is pushing for the internationalization of yuan to avoid any potential sanction by the US. After Russia invaded Ukraine, the US barred several Russian banks from the SWIFT interbank messaging system, isolating Moscow from the international cross-border settlement payments settlement.
China has been pushing to increase the global use of yuan and has signed bilateral currency swap deals with 40 countries. Some of the biggest ones include 400 bn yuan each with Hong Kong and South Korea, 350 bn yuan each with Bank of England and the European Central Bank, 300 bn yuan with Singapore and another 150 bn yuan with Russia.
“The announcement shows that the Chinese central bank has been making a huge effort to promote the construction of institutional infrastructure,” Ding Shuang, chief Greater China economist at Standard Chartered Bank, tells SCMP. “This could be due to the weaponization of finance in recent years.”
Beijing has also developed the Cross Border Interbank Payment System, an alternative to SWIFT, while also exploring the use of digital yuan for cross-border payments.
