China’s yuan liquidity reserve pool highlights efforts to loosen US dollar hegemony

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 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.

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.