CIPS set to become pillar of RMB ecosystem
The China cross-border interbank payment system (CIPS) may struggle to get a large number of banks to sign up as direct participants, but with new features such as netting set to be added, it will become an essential component of China’s renminbi internationalisation strategy.
Following its launch in October 2015, CIPS has operated smoothly, with transaction volumes rising on the back of Chinese reforms, such as the liberalisation of access to the China interbank bond market. As a result, market sources report that volumes were up by around 15% in the second quarter of 2016 compared to the first. However, CIPS and People's Bank of China (PBoC) are yet to publish official figures.
While usage is on the rise, one question about the further development of the platform has been how much China would seek to broaden the range of institutions that are allowed to link up with the system directly. At launch, CIPS was only open to the onshore branches of just 19 local and foreign banks.
The most recent development for CIPS came in July when Bank of China Hong Kong (BOCHK) became the first foreign branch to link directly to CIPS. BOCHK became the first RMB clearing bank outside of the Mainland as early as 2003, and remains a pillar of the global RMB payment infrastructure, with most banks still using it as the gateway for payments into China.
Yet, despite BOCHK joining up, the fact that the bank already had access to the previous onshore payment systems, called China National Advanced Payment System (CNAPS) hardly makes the development a turning point for other offshore banks dealing with RMB payments.
A better hint of where CIPS may be headed comes from the Society for Worldwide Interbank Financial Telecommunication (Swift),which signed a co-operation agreement with China International Payment Service Corporation – the entity set up by the PBoC to run CIPS in Shanghai – in March 2016.
Michael Moon, head of payments markets, Asia Pacific, at Swift, told GlobalRMB that the future of CIPS would likely involve a broader group of participating institutions.
"If you think about what needs to happen to globalise the RMB, more of these offshore connections [to CIPS] will be needed, and especially more direct connections to the banks."
Yet, although the number of banks set to take advantage of CIPS is likely to grow, that does not mean that those financial institutions are likely to enrol as direct participants (DPs). DPs are bank branches that open an account with China's central bank to interface with CIPS directly.
"If you look at the US, any bank can open an account and be a direct participant in CHIPS [Clearing House Interbank Payments System]," said Michael Vrontamitis, head of trade, product management, transaction banking, Standard Chartered. "The real question is how many do."
Even with the dollar being by far the most used currency globally, CHIPS only had 48 participants as of February 2016, according to the organisation's website. The Euro1 system, which processes large value euro payments, has 53 participants, according to data by its managing entity EBA Clearing.
Making an exit
Broader developments also make a surge of banks rushing to become DPs in CIPS unlikely. The costs of setting up direct clearing with the various infrastructure providers around the world is a large obstacle to direct participation, so the trend has been rather toward a few global banks becoming direct participants in the clearing systems for G7 currencies, for example, and offering their clients unified clearing solutions for those currencies from anywhere in the world.
"The reality is that in the current global banking environment you see banks exiting the clearing business and not entering it," said Vrontamitis. "We encourage banks to open clearing accounts with us given that we have a branch in Shanghai that is a direct participant in CIPS."
Instead, developments in the Hong Kong RMB infrastructure are likely to give a sense of what solutions better suit market needs. In Hong Kong, RMB transactions happen on the real time gross settlement (RTGS) system, which is in turn connected to CNAPS, which is the infrastructure used in China for domestic payments.
Given that the Hong Kong RTGS and CIPS are more compatible with each other than CNAPS – the latter only uses Chinese characters for its messaging format, for example – market participants expect to see a shift from CNAPS to CIPS.
For StanChart's Vrontamitis, the BOCHK move to CIPS was not surprising.
"The system in Hong Kong has been very successful, with RMB volumes greater than Hong Kong dollar clearing volumes, and over one thousand participants in the RTGS," he said. "But with the migration from CNAPS to CIPS [for cross-border payments], it is natural for the clearing bank, which used to clear via CNAPS, to become a CIPS member."
The value of RMB payments cleared through Hong Kong RTGS have averaged Rmb16.7tr ($2.5tr) every month this year, even surpassing the Hong Kong dollar payments on the system, according to CEIC data. Given that those volumes represent some 70% of global RMB transactions, according to Swift statistics, the transition away from CNAPS will likely make CIPS rapidly more relevant.
The next stage
Other features are also being considered for CIPS, starting with netting and an expansion of operating hours.
The current version of CIPS operates on a gross settlement basis, which increases the amount of liquidity each participant needs to supply on a daily basis. Netting, which reduces the amount of liquidity required to settle payments among the banks, is likely to be introduced to increase CIPS's efficiency, although no one has put a timeline on the possible addition.
The second aspect revolves around extending the systems operation to a nearly 24 nhour basis, similar to the standard for other international payment systems. CIPS is open 11 hours daily compared to the 20 hours for CHIPS. While not all payment systems operate around the clock, China's ambitions for the RMB to become an international trade and investment currency give the issue more urgency.
"With the RMB entering the IMF special drawing rights (SDR), if you have a global clearing activity it should be available to all countries so that anyone can use the system when making and clearing payments in RMB," said Biswajyoti Upadhay, head of product management, transaction banking, Greater China and North Asia at StanChart. "The general direction of travel is to make it global."
Swift's Moon also expected securities transaction to be patched onto CIPS eventually, in what would turn a system primarily used for trade and investment transactions into a hub for all payments in and out of China.
"A possibility is using CIPS as a kind of central clearing infrastructure for many of the RMB-denominated securities that are cleared in the [Hong Kong] RTGS," he said. "CIPS could come to be seen as the central place for cross border transactions. We are talking to banks and infrastructure providers and see a big role for Swift to help them in terms of securities market infrastructure."
In terms of timing such an expansion of the platform could come in a relatively short time, Moon noted.
"The efficiency, quality of services of securities market infrastructure they would need to offer is not a 10 year plan, but a much shorter term than that. I cannot say whether it will lead to a greater opening of the Chinese capital account, but the liberalisation plan is there."