By Stéphanie Marelle, Head of BNP Paribas Securities Services, Hong Kong
The march of the renminbi towards global recognition is as relentless as it is inevitable. China has been making huge strides towards opening up its financial markets and seeking higher levels of global integration. This year was punctuated with the announcement that from 2016 the Chinese currency will be included in the IMF’s global reserve currency basket. But, the Cross-border Interbank Payment System (CIPS), launched on 8th October 2015 is just as worthy of recognition as an important development for the renminbi as a globally used currency.
First announced in March 2015, CIPS is a worldwide interbank payment system backed by China’s central bank. The system’s main purpose is to facilitate the use of the renminbi globally by cutting costs and process times, streamlining clearing and settlement.
According to comments by the People’s Bank of China (PBOC) at the launch, CIPS will be used to support cross-border goods and services trade settlement, direct investment, as well as financing and individual fund transfers. Officials colourfully described it as a “payment superhighway”.
A running start
A strong and diverse range of participants from the start showed the market enthusiasm and point to it being a quick success. Initially participants are split between two designations. Currently 19 international and domestic banks are direct participants to the system and this includes BNP Paribas (China) Ltd. Direct participants must open nostro accounts with CIPS Shanghai Ltd. Indirect participants, of which there are 38 Chinese banks and 138 foreign financial institutions, are able to use CIPS through one of the direct participants.
It is widely expected that the numbers using the system will increase over time encouraging more participation from all over the world. CIPS is set to rollout in two phases, with the second due to bring more flexibility and perhaps the possibility of settlement between two offshore entities which will increase the capabilities of the network.
Winds of change?
The solution prior to CIPS was to process renminbi globally over a patchwork of existing networks, creating difficulty in Straight-through processing (STP), reliability and adding costs to transactions. Cross-border renminbi clearing could only be conducted through one of the clearing banks in the offshore hubs or through a correspondent bank in mainland China. As the renminbi has rapidly increased in usage, becoming the fourth most-used world payment currency in August, there are increasing demands for easier settlement options and more liquidity.
Also the Swift network, that is universally used for global payments, does not support Chinese characters, causing a further connection issue with China’s domestic interbank clearing and settlement system, the China National Advanced Payment System (CNAPS).
This isn’t going to lead to a rapid and fundamental change at this stage but rather an enhancement. Swift remains at the centre of the global infrastructure for financial payments given its strength in supporting the US Dollar. CIPS seems, at first at least, to serve as a complementary offering as it will operate using the same standard messaging syntax to enable easy adoption. CIPS will use Swift for interbank messaging but there would seem to be a likelihood that in the future it will operate independently and have its own direct communication line between financial organisations should it take off and be popular amongst institutions.
Improving renminbi transactions
The promise of this development is that CIPS provides new channels for institutions wishing to transact the renminbi or make payments in a more effective way. What we are expecting to see as adoption increases is that aside from direct cost and speed, there are a number of areas of direct benefit to business operations.
Companies will be able to benefit from the efficiency brought by higher STP rates. This provides more visibility on the cross-border payments and collection instructions.
Standardisation will assist operations as CIPS will be aligned with the globally used syntax ISO 20022. The system will also seamlessly be able to support Chinese and English languages.
The improvements in cut-off time will extend the operating hours for payments. This is particularly relevant for participants in Europe as they will be able to carry out same day payments in an easier manner.
2016 and beyond
China’s hope is that these developments will move the renminbi forward in terms of its standing against other global currencies by reducing or removing some of the previous factors stacked against it. The alignment of payment formats, and the revamping of the routing of renminbi payment flows, will certainly assist in risk reduction and liquidity optimisation. There will also be more alignment to the cut-off time and operating hours compared to other currencies.
The IMF recognition for the year may well grab the headlines, but key developments around the infrastructure for transacting in renminbi, and the increasing adoption of CIPS by market participants, are an important support-act.
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