Beijing creates its own global financial architecture as a tool for strategic rivalry
China has created the Cross-Border Interbank Payment System (CIPS) to facilitate the use of the renminbi as an international trading currency. China thus makes its own trading and financial relationships more streamlined, reduces illicit transfers, and provides a level of protection from sanctions. The number of direct and indirect clearing banks enrolled in CIPS has climbed substantially within a short time. China hopes that as the system develops and increases the volume of renminbi transactions, the global dominance of the US dollar will decrease.
A financial backbone emerges
On 8 October 2015, China launched a new payments system—the Cross-Border Interbank Payment System (CIPS)—that uses China’s currency, the renminbi (RMB), for international transactions. Beijing also announced the creation of the China International Payment Service Corporation (CIPS Corp.) Limited to operate CIPS, CIPS Corp. is under the supervision of the central bank.
This new payment system and the related financial e-infrastructure provide capital settlement and clearing services to banks for RMB-denominated, cross-border and offshore transactions. It is seen by most observers as a significant initiative in China’s drive to facilitate and promote the international use of its currency. On the day of the launch, the Industrial and Commercial Bank (ICBC) in Singapore cleared RMB 35 million (USD 7.8 million) on CIPS. This was the first such transaction for ICBC and consisted in a trade settlement payment from Singapore’s Raffemet Pte Ltd to Baosteel Resources in Shanghai. On that same day, the Bank of China (BoC) in Sydney processed its first RMB transaction through CIPS—a RMB 37 million transfer to China on behalf of an Australian company—and Standard Chartered completed its first RMB, CIPS-mediated transaction from China to Luxembourg on behalf of IKEA. Standard Chartered (Hong Kong) referred to CIPS as a “game-changer”, and suggested that its power “should not be underestimated”.
According to the deputy-governor of the People’s Bank of China (PBOC), Fan Yifei, CIPS constitutes an “important milestone” in the internationalisation of the RMB. According to him, CIPS “will boost [the] global use of the RMB, by cutting costs and processing times” and play a significant role in “shoring up China’s real economy”, as well as “promote domestic [China’s] enterprises ‘going abroad’ ”. In a written statement, the central bank declared that CIPS is a “milestone” in the development of China’s financial market infrastructure, and marks “major progress” in building a modern payment system that supports “both domestic and cross-border payment” in RMB.
The reasons behind it
Why was CIPS created? China’s central bank notes that, since 2009, Beijing has adopted a number of policies and programs to facilitate the cross-border use of RMB in trade and investment, and promote the “international acceptance of the RMB”. Prior to CIPS, most of the cross-border RMB clearing was done through offshore RMB clearing-banks that China’s central bank had appointed to serve Hong Kong, Singapore, London, and as of March 2015 Toronto and Vancouver (via ICBC Canada located in Toronto). The other channel was an onshore RMB Agent Bank inside mainland China, but this channel was used less frequently. The offshore clearing banks remain crucial because China’s domestic interbank clearing and settlement system, the China National Advanced Payment Systems (CNAPS), was not linked directly to supporting international payment networks.
While the dual clearing system that has operated since July 2009 did support the use of the RMB internationally, the pre-CIPS clearing arrangements were limited. The Financial Times wrote that RMB payments to and from China were slow and costly to execute; it also noted that China’s domestic payments system only supported Chinese characters, making it incompatible with SWIFT, the messaging system that banks use to exchange payment details. Bank analysts highlighted that misunderstandings happened from time to time under the pre-CIPS clearing systems, due to different coding and the use of different languages.
According to observers, CIPS achieves a breakthrough by offering a single platform and improved efficiency. Reuters suggests that the launch of CIPS would “remove one of the biggest hurdles to internationalising the yuan and should greatly increase global usage of the Chinese currency by cutting transaction costs and processing times”. With the launch of CIPS, a “worldwide payments superhighway for the yuan” will “replace a patchwork of existing networks” that has made the processing of RMB payments a cumbersome process. The patchwork of existing clearing banks and networks also have raised concerns of fraudulent practices; there have been instances when Chinese regulators have caught Chinese bank branches (RMB clearing banks) using their internal channels to recycle offshore RMB back into China for illicit purposes.
The PBOC implicitly acknowledged the shortcomings of the existing dual arrangements, writing that, “With the RMB becoming the second largest cross-border payment currency in China, and the fourth most used payment currency globally, it is imperative to build [improved] infrastructure to support the development of RMB business”. The CIPS is designed to enable companies outside of the People’s Republic of China (PRC) to clear RMB transactions directly with their Chinese counterparts, and thereby reduce the number of stages involved in a payment. The head of treasury for a large European multinational corporation (based in Hong Kong) has stated that direct clearing through CIPS marks an important development for small- and medium-sized enterprises operating in China, as their correspondent banks can now access a wider network for settling payments in RMB, leading to lower costs. CIPS also would remove operational inefficiencies for large multinational corporations as the latter would no longer have to worry about ensuring that RMB transactions were only being processed at certain times of the day.
Statecraft and strategy
Whereas the points discussed above suggest that CIPS is largely driven by technical considerations, one should remember that the system was also created in response to strategic policy goals and is rooted in strategic rivalry with the US. The central bank notes that the Central Committee of the Chinese Communist Party (CCP) and China’s State Council attach “great importance to the project”. In the Chinese Premier’s Report on the Work of Government delivered to the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) sessions in March 2015, Li Keqiang said, “We will make steady progress in realising the convertibility of the RMB capital accounts, expand the use of the RMB internationally, accelerate the establishment of a cross-border payment system for the RMB, [and] improve the worldwide clearing system for the RMB …” The PBOC interpreted the Premier’s instruction as “we need to speed up the building of CIPS and improve RMB global clearing service”, in order to successfully promote a greater use of the RMB internationally.
CIPS’ creation underscores the fact that China’s senior Party leaders have come around to supporting international currency and reserve diversification, and increasing the use of China’s currency globally. They also support taking gradual steps to further open the capital account, increase the role for the market in China’s financial sector, and the role of market determination of the exchange rate. Since the early 2000s, the PRC has urged the international community to diversify international and reserve currency options, and since 2009 it has pursued such diversification measures. Its most direct actions in this regard have been promoting the international use of the RMB. CIPS, when fully operational, will facilitate round-the-clock RMB-denominated trade and investment transactions, and 24-hour trading of RMB. The current dual clearing system does not allow for such 24/7 transactions.
By facilitating and encouraging the increased international use of RMB, Beijing also lessens the supremacy of the US dollar, seeking de facto de-dollarisation. In 2014 and 2015, the PRC also successfully lobbied International Monetary Fund (IMF) members to add the RMB to the basket of currencies that make up the IMF’s reserve management tool, the Special Drawing Rights (SDR). In October 2016, the RMB joined the SDR reserve basket along with the US dollar, the euro, the Japanese yen and the British pound. CIPS is Beijing’s effort to create new technologies and systems that support greater international use of RMB as well as the global rise and acceptance of the RMB through an improved international payments system.
CIPS provides the electronic payments platform for the PRC’s other major strategic policy, the Belt and Road Initiative (BRI), which was announced by Xi Jinping in 2013, and written into the Party’s Constitution in November 2017. The CCP leadership portrays BRI as supporting inclusive growth in countries along the Belt and Road, and more international trade within the region. It also sees it as providing a golden opportunity to promote the international use of the RMB throughout much of Asia, Africa and Europe. CIPS is thus seen as a tool to lower transaction costs, enhance overall competitiveness, prevent financial risks, as well as accelerate trade integration, economic cooperation and currency integration across the BRI region.
Beijing is also concerned by the rising tide of US international financial sanctions. The PRC has observed how Russia, Iran, North Korea, Sudan and other states have been affected by these sanctions. It also remembers the US imposing trade embargos and financial sanctions on China during the Cold War. It is aware that certain governments pressure SWIFT to cooperate on the application of sanctions, and call upon it to block certain states from being able to use SWIFT to make payments. China is aware that Moscow, Tehran and other governments are keenly interested in creating or strengthening alternative international payment systems that can lessen the threat of US sanctions.
A fully operational CIPS, which reduces the PRC’s reliance on SWIFT, has a number of other advantages. Beijing is mindful of the fact that US and European banks dominate SWIFT’s governance and that their systems and networks are geared towards handling US dollars (SWIFT is perceived as playing an important role in maintaining the global dominance of the dollar). It is also concerned by the fact that US security and intelligence agencies looking to track international payments are allegedly able to access the system.
Expanding the network of participants
The network of banks taking part in CIPS has expanded dramatically since its launch in October 2015. The number of direct clearing banks has increased from 19 in October 2015 to 31 in February 2018, and the number of indirect clearing banks enrolled in CIPS has climbed from 198 to 681.
The initial batch of direct clearing banks in CIPS included eleven PRC banks (ICBC, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communication, China Merchants Bank, Pudong Development Bank, China Minsheng Bank, Industrial Bank, Pingan Bank, Huaxia Bank), and eight foreign banks (HSBC China, Citibank China, Standard Chartered Bank China, DBS China, Deutsche Bank China, BNP Paribas China, ANZ Bank China, Bank of East Asia). Of the initial group of indirect clearing banks in CIPS, 38 were Chinese domestic banks, and 130 were overseas banks located in Asia, Europe, Oceania and Africa.
The links to North America have expanded. Whereas only seven banks in North America were enrolled as indirect participants in 2015, by early 2018, twenty-five banks had signed on as indirect participants, including seven banks in Canada: ICBC (Canada), BMO, CIBC, the National Bank of Canada, HSBC (Canada), Bank of China (Canada) and CCB (Toronto).
A number of factors account for the dramatic increase in the number of direct and indirect participants in CIPS from 2016 to 2017. The most important one appears to be the Memorandum of Understanding (MoU) that was signed between CIPS Corp. and SWIFT in March 2016. This MoU sets out a strategic cooperation plan between CIPS and SWIFT that involves connecting CIPS to SWIFT’s community of global users. As a result, the number of direct and indirect participants that adopted CIPS increased as banks in the SWIFT network were brought into its own network. SWIFT is a member-owned cooperative with more than 11,000 financial institutions operating in more than 200 countries. SWIFT is already supporting more than 150 payment and settlement systems worldwide. To date, more than 1,700 financial institutions have already made RMB transactions using the SWIFT network. CIPS Corp. has a particular interest in SWIFT’s network, experience and expertise in building secure, efficient and reliable channels to connect payment systems with a global user community.
SWIFT has been operating in China for more than thirty years, and nearly 400 Chinese financial institutions and corporations are already connected to it. SWIFT was interested in signing an MoU with CIPS as it had been aware that Chinese authorities were considering replacing SWIFT with an indigenous network built to rival, if not exceed, SWIFT’s own so as to promote the international use of the RMB in the name of China’s security. SWIFT was very concerned about China’s medium- to long-term intentions: whether the PRC was looking to abandon, displace or replace SWIFT in addition to increasing the international use of the RMB, and reduce the systemic reliance on the US dollar. SWIFT was therefore eager and relieved to sign the MoU with CIPS Corp.
For now, CIPS Corp. appears to be trying to create a smoother process by positioning itself as the middleman between SWIFT and the China National Advanced Payments System (CNAPS). CIPS is modelled on the Clearing House International Payment System (CHIPS), the US dollar payments network that supports about USD 1.5 trillion in payments each day. The Financial Times reports that CIPS will begin using SWIFT for interbank messaging, but it eventually will have the ability to operate independently. The new CIPS system also eventually will allow offshore banks to participate in offshore-to-offshore RMB payments, as well as those into and out of China, but the roll-out has started only with onshore entities. A lead reporter of the Financial Times quotes a “person with knowledge of the PBOC’s plans for CIPS” as saying, “In the future CIPS will move in the direction of using its own dedicated [communication] line. At that point, it can totally replace SWIFT”Footnote 74 .
At the CIPS Corp.-SWIFT MOU signing ceremony, the CIPS Corp. Executive Director Li Wei stated “China International Payment Service Corporation is looking forward to benefiting from SWIFT’s platform and services to provide an efficient and convenient channel to the global financial community”. Li noted that CIPS was working with SWIFT to make MT messaging standards, widely used in cross-border banking transactions, compatible with the ISO20022 standards used by CIPS, through a conversion scheme. Li added, “We [CIPS Corp. and ‘China’] aim to provide an inclusive platform to capture cross-border RMB flows to all types of participants which will significantly extend the reach of RMB internationalisation”.
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