China move banks on greater use of yuan
The yuan’s internationalisation has been an arduous and gradual process. China has taken another cautious yet significant step in anchoring its currency in the global financial system. Seen by some as another attempt at so-called de-dollarisation to counter the United States’ global monetary dominance, it is actually, perhaps even more significantly, a natural evolution of the yuan’s status as the currency of the world’s second largest economy and top trading nation.
The latest scheme means China will provide a renminbi liquidity arrangement at the Bank for International Settlements, often referred to as the central bank of central banks. To create a reserve pool at the bank, China will contribute a minimum of 15 billion yuan (HK$17.6 billion). Other participating central banks will deposit the same amount in yuan or its equivalent in US dollars. The goal is to help protect participating economies against market stresses and to safeguard financial stability. They cannot only draw down on their contributions, but also gain access to additional funding, if necessary, through the reserve pooling.
So far, the pool will concern mostly those in Asia and the Pacific, as the initial participating central banks will be those of Indonesia, Malaysia, Singapore, Hong Kong and Chile. The list is expected to expand. “Out of region” Chile is China’s third-largest trading partner in South America where Beijing has made significant inroads in both trade and diplomacy.
China has already signed more than 3 trillion yuan worth of bilateral currency swaps with more than 40 countries, including 400 billion yuan with 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.
The new liquidity facility with the Bank for International Settlements is therefore a natural – and multilateral – extension of those bilateral arrangements. There is great incentive for more economies to join what is, in effect, an insurance against financial turmoil and trade disruptions. The rising volatility in global financial markets due to high inflation and the economic fallout from the war in Ukraine have made China’s case even more urgent and relevant.