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RMB liquidity plan boosts stability of monetary system

The Bank for International Settlements announced on Saturday that it and the People”s Bank of China have jointly established a Renminbi Liquidity Arrangement to create a reserve pool for providing liquidity support to participating central banks during market volatility in the future.

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.

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 US.

Lately, the renminbi has been used more often in trade settlements, international investment and financing, and foreign exchange transactions, more central banks have included it in their foreign exchange reserve pools, and market players have gradually displayed increased willingness to use it. However, the Federal Reserve is speeding up tightening of monetary systems and launched the process of balance sheet contractions in June. Against this backdrop, the launch of a renminbi liquidity arrangement is of great significance to defusing potential risks.

Considering the global economy is facing the risk of entering a new era of high inflation, the immediate task for central banks is to restore low and stable inflation. In the past, when liquidity or financial crises occurred, the international liquidity replenishment arrangements were mainly based on currencies of developed economies such as the US dollar, and the participants were mainly the central banks of developed economies, while emerging economies had limited liquidity replenishment channels and were more vulnerable to international financial risks.

Therefore, the renminbi liquidity arrangement, which includes major emerging economies in the Asia-Pacific and Latin America, will offer new choices for emerging economies, helping improve China’s participation in the international monetary system. Under the multipolar international monetary system, the internationalization of the renminbi will greatly alleviate the “Triffin problem” of the US dollar and enhance the stability of the international monetary system.

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