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The Bank for International Settlements (BIS) has partnered with the People’s Bank of China (PBOC) to develop a new reserve pooling scheme for central banks in Asia-Pacific.
The Renminbi Liquidity Arrangement (RMBLA), as the scheme is known, aims to provide liquidity support to participating central banks during periods of market volatility.
To take part in the RMBLA, each central bank must transfer a minimum of ¥15bn or its US dollar equivalent ($2.24bn) to the BIS, creating a reserve pool.
Initially, the liquidity arrangement will be supported by Bank Indonesia, Bank Negara Malaysia, the Hong Kong Monetary Authority (HKMA), the Monetary Authority of Singapore (MAS) and the Central Bank of Chile.
The reserve pooling will allow participating central banks to draw down on their contributions, and will also allow them to access additional funding through a collateralised liquidity window operated by the BIS.
The BIS said it is well placed to manage the liquidity arrangement, given its existing banking relationships with the participating central banks and its highly liquid and flexible balance sheet.
It added that the liquidity arrangement will help safeguard against market stresses and promote financial stability in Asia-Pacific.
In the early days of the COVID-19 pandemic, all of the central banks set to participate in the RMBLA introduced either liquidity provisions, targeted lending or both in an attempt to address shortages and prevent market freezes.
In the future, having a shared reserve pool could enable these central banks to coordinate their responses faster and more effectively.
Renminbi goes global
The liquidity arrangement should also be seen in light of China’s plans to internationalise the renminbi and challenge the supremacy of the US dollar as the global reserve currency.
In March this year, a paper by the International Monetary Fund (IMF) showed how this effort is already bearing fruit, albeit slowly.
According to an IMF survey, the share of central bank reserves held in US dollars has fallen from 71 percent in 1999 to 59 percent in 2021.
However, other long-standing reserve currencies such as pound sterling, the yen and the euro have not gained from the dollar’s loss of reserve share.
Instead, about a quarter of the dollar’s loss has been taken up by the renminbi, while the other three quarters has been taken up by currencies of smaller nations that have traditionally played a limited role as reserve currencies, such as the Australian dollar, Canadian dollar and Swiss franc.
The survey authors note that China’s currency internationalisation strategy has been aided by its Belt and Road investments, its growth in both imports and exports, and its global network of renminbi currency swaps and official clearing banks.
Additionally, in 2016 the renminbi was added to the IMF’s Special Drawing Rights (SDR) basket, alongside the US dollar, yen, euro and pound sterling.
The SDR is an interest-bearing international reserve asset created by the IMF to supplement other reserve assets of member countries.
The SDR is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
Finally, China has already become one of the first major economies to issue a limited rollout of a central bank digital currency (CBDC).
This head-start could potentially enable China to start incentivising other nations to use the digital yuan long before a digital US dollar or digital euro even exists.
