Prof: China's Yuan Pooling Scheme to Erode US Dollar Hegemony & Open Door to New Currency Zones

The People’s Bank of China (PBOC) and Switzerland-based Bank for International Settlements (BIS) signed the Renminbi Liquidity Arrangement (RMBLA) to create the yuan (renminbi) liquidity reserve pool which is aimed at further internationalizing the Chinese currency and loosening the grip of the US dollar's dominance.

"Such a [yuan] pooling scheme could represent a major alternative to the US dollar hegemony, particularly for all those economies whose foreign trade with the member countries of this scheme is important in terms of both national income and employment," says Sergio Rossi, professor of macroeconomics and monetary economics at the University of Fribourg, Switzerland. "It amounts to offering to these countries a valid alternative to avoid using the US dollar, also with regards to the possibility to circumvent US sanctions for whatever reason."

The PBOC is not alone in spearheading the new yuan pooling scheme, with Bank Indonesia, Bank Negara Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore and the Central Bank of Chile also jumping on the Renminbi Liquidity Arrangement's (RMBLA) bandwagon.

Each participating central bank contributes a minimum of 15 billion yuan or US dollar equivalent, which amounts to $2.2 billion, to the BIS in order to create a reserve pool. "When in need of liquidity, participating central banks would not only be able to draw down on their contributions, but would also gain access to additional funding through a collateralized liquidity window," the PBOC official statement says. The China central bank signaled its readiness to satisfy reasonable demand for Chinese yuan and pledged to make active contributions "to strengthening regional financial safety net."

"This would change the US soft power considerably, thereby putting the United States at the same level playing field with all other countries that are part of the global economy," assumes Rossi. "Such a pooling scheme would also slowly reduce the impact of US monetary policy decisions across the world, since it would de-dollarize the global economy, hence making central banks’ decisions much less dependent on the policy stance of the US Federal Reserve."

One of the reasons to speed up the launch of the yuan pooling scheme was the US Federal Reserve’s aggressive rate hikes which threaten to reverberate through the global financial system, according to the South China Morning Post. Back in January, Kristalina Georgieva, managing director of the International Monetary Fund, warned that the Fed's interest rate increases aimed at taming soaring inflation in the US could throw low-income countries around the world into “debt distress” and lead to economic crises.

Yet another reason behind China’s push to loosen US dollar dominance were unprecedented anti-Russia sanctions imposed on the country by the West after the beginning of the Russian special military operation in Ukraine, according to Hong Kong observers. The US and its allies froze the Russian central bank's assets and nixed access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) for the country's financial institutions.

"[The yuan pooling scheme] will certainly help prevent the weaponization of global finance in the not-too-distant future, since the yuan pooling scheme might be used by any kind of banks and non-bank financial institutions beyond the United States to obtain the credit lines those institutions need to carry out their own business strategies," stresses Rossi.

How Feasible Is It to Create a Dollar Alternative?

Meanwhile, some experts argue that the Chinese currency is still no match to the US dollar: yuan accounted for just 2.14% of global payments in April 2022, while the greenback's share amounted to a whopping 41.81%. At the same time the yuan is ranking fifth in terms of its proportion of global foreign exchange reserves with a 2.79% compared to the 58.5% for the US dollar and 20.6% for the euro.

However, it appears that under certain geopolitical circumstances the Chinese currency has every chance of catching up. Rossi forecasts that the creation of the yuan liquidity reserve pool could trigger a domino effect attracting other nations and accelerating the process of the global de-dollarization.

"This will accelerate de-dollarization, particularly in Latin American countries, where the dollar has been used as either a means of payment or a reserve asset that puts any monetary policy decision of the relevant central banks at stake," the professor says.

According to Rossi, the only country in a position to shatter the old Bretton-Woods financial order and create a viable alternative to the US dollar is China, "which is a major player not only on geopolitical grounds, but also within the global economy."

"It is the only possible way on practical grounds to move towards a structural reform of the international monetary regime that is currently affected by a systemic disorder, making the US a country that benefits of an exorbitant privilege, namely, to record trade deficits without tears – as the French economist Jacques Rueff famously put it in the 1950s," argues Rossi.

Given soaring inflation and looming recession in the US, the Asian countries, in particular, have a clear interest in solving "the international monetary disorder" problem before Washington's financial problems start spilling out into the world, according to the academic.

"Otherwise the US dollar dominance will affect all of them negatively, once the next systemic financial crisis will burst in the United States, where banks have been inflating a credit bubble for non-GDP-related transactions since long," he warns.

The professor presumes that other countries that might join the China-led yuan club in the future could be the oil exporting countries, notably in the Middle East, as well as those countries whose foreign trade with the current members of the pooling scheme is relevant for them.

"Once these countries join the yuan pooling scheme, other countries, particularly in Europe, will follow soon, leading to a multipolar international monetary regime where three regional currency areas will exist: the US dollar area, the euro area, and the yuan area," Rossi concludes.