‘Renminbi Liquidity Arrangement’ Is Step Toward Currency Stability

June 28, 2022 (EIRNS)—The People’s Bank of China central bank has established a currency stabilization fund in renminbi at the Bank for International Settlements (BIS) with six other central banks: those of Indonesia, Thailand, Malaysia, Hong Kong, Singapore, and Chile. The Renminbi Liquidity Arrangement (RLA) started with the equivalent of $20 billion in equal contributions by these banks in either renminbi or dollars. The RLA was actually announced by the BIS on June 26.

As stated in a June 28 article in China Daily, “At a time when the United States Federal Reserve is accelerating the pace of interest rate hikes and balance sheet reduction, and the international financial market is facing the potential risk of large fluctuations, the establishment of such an arrangement not only helps enhance the ability of emerging economies, but also represents the latest progress of the renminbi’s internationalization.” So, the triggering problem is the severe damage to developing countries’ currencies and economies from the Federal Reserve’s rapid succession of rate hikes, coming on top of the weaponization of the dollar by sanctions. The article continues,

“According to China’s central bank, this arrangement is conducive to meeting the reasonable international demand for the renminbi. Liquidity support schemes initiated by the BIS are usually seen as long-term institutional arrangements, but through this arrangement, the BIS may also help prevent international financial risks triggered by the tightening of monetary policies in Europe and the U.S.”

In Russia, Nikita Kondratyev of the Ministry of Economic Development told the business website RBC on June 28 that to launch a new reserve currency, “it is necessary to build a joint financial architecture, increase the share of settlements in national currencies, reach a certain level of de-dollarization, something that is happening already in the BRICS countries,” reported. Sergey Storchak of the important Russian national investment bank VEB.RF, told Global Times during the BRICS summit, “The BRICS and other interested nations need to talk about setting up their own independent global financial system—whether it would be based on the Chinese currency or they will agree on something different.”

The renminbi liquidity arrangement can immediately stabilize the RMB’s level against the dollar, and consequently then be used to buy other developing currencies and stabilize their exchange rates; it can also grow larger by subsequent contributions. It is reminiscent of the Franklin Roosevelt administration’s “Good Neighbor” assistance to Ibero American governments, which often began with currency stabilization funds and then progressed, in some cases, to development lending.