Spotlight on the Yuan

A yuan cross-border interbank payment system is expected to accelerate the currency’s quest to go international By Wang Jun

Spotlight on the Yuan

A yuan cross-border interbank payment system is expected to accelerate the currency’s quest to go international By Wang Jun

The yuan reached yet another milestone on October 8 when the first phase of the Cross-Border Interbank Payment System (CIPS) was launched in Shanghai. The system, which provides capital settlement and clearing services for cross-border yuan transactions for financial institutions, will enhance the efficiency of the yuan’s cross-border settlement and promote its global use, said Fan Yifei, Vice Governor of the People’s Bank of China (PBC), the country’s central bank.

According to a PBC statement, the construction of the CIPS will happen in two phases. The first phase facilitates cross-border yuan transactions and supports cross-border settlement of trade in goods and services, direct investment, fund-raising and personal remittances. It connects China with most offshore yuan centers in Asia, Oceania, Europe and Africa.

“This is only the first step, and we have more to do, said Fan at the opening ceremony of CIPS. According to him, phase two of CIPS will offer participants more flexibility in settlements, cover more time zones and support more categories of cross-border businesses.

Hu Xiaolian, Chairwoman of the Export-Import Bank of China and former Vice Governor of the PBC, compared the CIPS to a worldwide“payment superhighway,” and said it will accelerate the internationalization of the yuan.

A financial infrastructure

Before the launch of the CIPS, cross-border clearing of the yuan had to be done through either offshore yuan clearing banks in Hong Kong, Singapore and London, or corresponding banks on the Chinese mainland.

According to figures from the PBC, in 2014, 23.6 percent of cross-border transactions between China and other countries were settled in yuan. In the meantime, the use of the yuan in cross-border trade and direct investment has been fast increasing. In 2014, yuan payment for cross-border trade totaled 6.55 trillion yuan ($1.03 trillion), surging 41.6 percent year on year. Outbound direct investment from the Chinese mainland priced in yuan totaled 186.56 billion yuan ($29.43 billion), an increase of 117.9 percent, while foreign direct investment onto the Chinese mainland settled in yuan amounted to 862.02 billion yuan ($135.97 billion), soaring 92.4 percent year on year.

Latest figures compiled by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) show that in August, the yuan overtook the Japanese yen for the first time, clinching the spot for the world’s fourth largest payment currency. Yuandenominated payments accounted for 2.79 percent of the global market in the month, compared to the January 2014 proportion of 1.39 percent.

Cross-border trade settlements denominated in the yuan are expected to climb to over 50 percent of China’s total trade by 2020, more than doubling the current level, said HSBC Group CEO Stuart Gulliver in March. Gulliver made clear his expectations that the yuan will finally become a main reserve currency alongside the U.S. dollar and euro.

According to the PBC statement, in the first phase of the CIPS, 19 banks were approved by the central bank to directly participate in yuan transactions using the system. These banks include 11 from China and eight from other countries and regions. Of these, the four major Chinese state-owned banks—the Industrial and Commercial Bank of China, Bank of China, China Construction Bank and the Agricultural Bank of China—are allowed to open accounts with the CIPS and receive services directly. In the meantime, 38 Chinese banks and 138 foreign banks in Asia, Europe, Oceania and Africa have been approved as indirect participants of the system. They are allowed to provide CIPS services indirectly through one or more of the direct participants.

On September 8, the PBC established an independent limited company in Shanghai that was responsible for CIPS operations. Subject to oversight and the administration of the PBC, the company will improve various functions of the CIPS, strengthen internal management and increase the efficiency and competitiveness of the CIPS. In the future, the CIPS’s operator will also strengthen cooperation with other international clearing organizations and financial infrastructure operating institutions in order to develop the international market.

“The establishment of the CIPS is an important milestone in yuan internationalization, providing infrastructure that will connect global yuan users through a single system,” said Helen Wong, CEO of HSBC Greater China, speaking to the Financial Times.

“Because of the fast growth of cross-border yuan businesses, there is increasing demand for an international yuan clearing platform that adopts global market standards and offers efficiency in terms of trading time and language, as well as risk and liquidity management,” she added.

Standard Chartered Bank (China) Ltd. said on October 8 that it has successfully completed a yuan clearing transaction from China to Luxemburg for IKEA, the Swedish home furnishing retailer. This transaction is the bank’s first international yuan direct clearing unit through the newly launched CIPS.

For a more international yuan

According to the Renminbi InternationalizationReport 2015 released by the PBC in July, by settling with the yuan in international trade, Chinese companies can avoid currency mismatch and exchange rate risks, hence saving on currency conversion costs and improving the efficiency of capital use. More and more Chinese companies have begun using the yuan as a settlement currency, accelerating the growth of yuan businesses by both Chinese and foreign banks in China. It is expected that more cross-border transactions between China and other countries will be settled in the yuan.

Launching the CIPS will significantly improve the efficiency of the yuan’s cross-border settlements, thereby laying solid foundations for the internationalization of the currency. Moreover, more measures promoting the liberalization of the capital account have been issued recently so as to realize the internationalization of the yuan.

On July 14, the PBC released a notice on issues concerning the investment of foreign central banks, international financial institutions and sovereign wealth funds with renminbi funds in the interbank market. The notice introduces a registration system, eliminates quotas for these foreign institutions, expands the authorized investments into a broad range of interest rate instruments including cash bonds, repo bonds, securities lending, bond forwards, interest rate swaps and forward rate agreements; and allows these institutions to choose between the PBC and other interbank settlement agents.

On September 22, HSBC Holdings Plc. and Bank of China (Hong Kong) received approval from the PBC to issue yuan-denominated bonds in China’s interbank bond market, making both groups the first offshore commercial banks to gain approval from China’s central bank to issue yuan-denominated bonds in China’s domestic interbank bond market.

October 8 continued to be a big day for the nation as China took further steps toward the IMF’s currency basket of the special drawing rights with the PBC’s website announcement that China will adopt the IMF-created Special Data Dissemination Standards and conform to those standards. According to the PBC, this will help improve transparency, reliability and international comparability.

The move was welcomed by IMF Managing Director Christine Lagarde, who said in a statement that this will “greatly enhance the availability of timely and comprehensive economic and financial data.” ■

Copyedited by Kylee McIntyre

Comments to wangjun@bjreview.com

The HSBC the go-ahead to issue 1 billion yuan ($158.23 million) in panda bonds, a type of yuan-denominated bonds from non-Chinese issuers sold on the Chinese mainland. Meanwhile, the Hong Kong Branch of Bank of China

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