China's international payment system gathers steam
One month in and it’s a case of so far so good for the China International Payment System (CIPS), even allowing for limitations in operating hours.
The headquarters of the People's Bank of China in Beijing
Nineteen banks – including nine foreign institutions – are connected directly to CIPS, allowing them to clear cross-border RMB payments without using an offshore clearing centre.
The current working hours for CIPS are 9am to 8pm Beijing time and the system covers immediate settlement for large tickets.
Expanding the membership base is key to the first phase before proceeding to phase two
Given that CIPS has only been operational for a little over four weeks, it is understandable that Yang Du, head of Thomson Reuters’ China business desk, believes its impact has yet to be fully felt in the renminbi market.
He says it would be a surprise to see immediate growth of RMB settlement volume purely led by the new platform.
“Full convertibility, availability to trade, hedge and invest, and the desire to settle in RMB remain the driving pillars of CIPS’ future success, but the payment system marks an official moment to increase the efficiency of RMB around the world,” says Du.
“Seventeen branches of four major Chinese state-owned banks across the world are now set to become the first group of clients opening accounts on CIPS under PBoC [People’s Bank of China] and the system will have more to deliver in phase two.”
An ideal clearing platform would enable liquidity from the central bank whilst also being equipped with a netting capability, which is expected for the next phase of the system, explains Du.
“Expanding the membership base of participating banks is key to the first phase over a period of one to two years before proceeding to phase two.”
Yigen Pei, Citi’s China head of treasury and trade solutions, accepts it will take some time to realize all the benefits of the system, although he says the current operating hours cover time zones where the majority of cross-border RMB transactions take place.
Frankie Au, head of RMB products transaction banking at Standard Chartered, describes the decision to focus on ensuring the stability of the system in the initial phase and providing room for further development down the line as prudent, and says payment processing with the system has generally been smooth and efficient.
“However, we expect the ongoing registration process for various overseas banks to become indirect participants to continue for some time, given the time taken to complete the required documentation,” he adds.
“We have seen a lot of interest from overseas banks asking for information about clearing payments over CIPS and we expect further extension of operating hours and provision of other netting alternatives to enhance liquidity efficiency to be in the pipeline for the next phase.”
According to Au, CIPS offers two main advantages over CNAPS (China National Advanced Payment System, the domestic funds transfer system) for handling cross-border RMB payments.
“The extended operating hours – covering European, African and Middle Eastern time zones – make it possible to settle payments in local time rather than waiting for next day settlement, and payment messages adhering to international standards enable more efficient payment processing,” he says.
Carl Wegner, Deutsche Bank’s head of global transaction banking, Greater China, refers to substantial improvements in the straight-through processing rate in the first month of CIPS operation and describes the extension of the window for payments from 5pm to 8pm Beijing time as a significant change in the market.
“Clients are just beginning to appreciate the expanded window and it will take some time for them to adapt their payment and decision processes to take full advantage of the later hours,” says Wegner.
“We also expect extended opening hours of the money market in order to provide more liquidity.”
'Cautious and conducive'
The first stage of CIPS will be only applicable to RMB trade-related settlement, excluding capital-related settlement, observes Cathy Dou, Bank of America Merrill Lynch’s head of global transaction services China.
“From where we stand, this approach is different from previous expectations,” she says. “There are several reasons driving this. Firstly, we think the government is more cautious in terms of timing and implementation.
“Secondly, a phased approach is more conducive to the current economic environment of China, with concerns of the economy slowing down.”
While referring to a number of future benefits, Dou also accepts that for the foreseeable future CIPS will have to co-exist with China’s legacy clearing systems.
Raymond Qu, CEO of Geoswift, a payment technology company, says it is difficult to predict how long CIPS will be available for relatively limited operating hours.
“Similar to other pilot schemes, the regulators will want to see whether the system and its operation are successful,” he concludes.
At the Boao-Europe forum – an international conference on financial cooperation between Asia and Europe – held in London this week, Zhang Xiaohui, assistant governor at the PBoC, signalled the role of CIPS in facilitating China’s macro-economic adjustment.
“Once it reaches the second stage [of growth], it will help Chinese capital markets and its [foreign] counterparties, and it will provide support [to the monetary system],” she says.