China's Central Bank Willing To Share $3 Trillion

China's Central Bank has over $3 trillion in reserves. They might be willing to share it. 

Brazil, Russia, India and China, the BRIC countries, are back to talking about creating a unified financial system where they can avoid euro and dollar volatility.  This time, a pooling of Central Bank dollars from the countries in case liquidity dried up as the world tracks the West’s crisis momentum.

Regardless of the amount of difficulty involved, the big four emerging markets plus South Africa said earlier this week they were considering setting up a foreign-exchange reserve pool and a currency-swap arrangement in an effort to avoid any credit crisis stemming from the advanced economies.

China President Hu Jintao and other leaders met in Los Cabos, Mexico for the G20 Summit. There, according to the Chinese Foreign Ministry, the leaders discussed the currency swap and foreign-exchange reserve pool ideas with their Russian, Indian and Brazilian peers.  Hu asked the finance ministers and central bank chiefs to implement these ideas, according to a story in China Daily on Wednesday morning.

Swap arrangements give central banks the ability to lend each other money in order to keep markets liquid. The pooling of foreign-exchange reserves are contingency measures aimed at containing crises such as the one roiling the eurozone, analysts told the paper.

If, for example, oil prices collapsed to 2008 levels of around $40 a barrel from the roughly $85 today, and if oil dependent Russia was in need for a few million dollars after rummaging through its own sizeable cash account at their Central Bank, they could, in theory, borrow from China’s $3 trillion international reserves. That would give the market some confidence that Russia is not forced to wipe out its reserves, sending Russian debt costs higher as investors wonder whether a country’s “rainy day” fund is enough to handle its obligations to bond holders.

Zhang Yuyan, director of the Institute of World Economics and Politics affiliated with the Chinese Academy of Social Sciences, said the new mechanisms established by the emerging markets themselves, who “know their current conditions and demands much better.”