CIPS, launched in fairly low-key fashion by the People’s Bank of China (PBoC) last October, has not been without controversy.
Earlier this year, the China Association for the Promotion of Development Financing suggested in an article in the central bank’s newspaper that the system could be used to reduce the amount of renminbi funds available in the offshore market when short-selling arises.
A large volume of yuan liquidity was released through CIPS to offshore markets after the launch of the system. However, the PBoC denied it used CIPS to adjust offshore RMB liquidity.
Participation in the system has grown relatively modestly. At launch, CIPS had 19 directly participating banks – including nine foreign institutions – and another 176 banks indirectly involved.
In March, the number of indirect participants was increased to 253 and the institution that manages CIPS signed a memorandum of understanding with Swift, the global financial messaging service, setting out plans to connect CIPS with Swift’s global user community.
CIPS executive director Li Wei has said his aim is to provide an inclusive platform to capture cross-border RMB flows to all types of participants.
According to Ersin Dalkali, market development manager for FX Asia-Pacific at Thomson Reuters, the increase of participating banks and geographical spread is promising and is going to lay the foundation for wider adoption.
“Following the agreement with Swift, the adoption of CIPS should accelerate as the number of direct participants will increase by utilizing the Swift network to connect directly,” explains Dalkali. “This will help CIPS become a mainstream platform for clearing and settling cross-border RMB payments.”
Frankie Au, Standard Chartered’s head of RMB products transaction banking, says whilst it might take time for the market to migrate cross-border CNY payments from China National Advanced Payment System (CNAPS) – the domestic interbank clearing and settlement system – to CIPS, volumes grew by 14% in the second quarter of this year.
“The recent approval of the second batch of participating banks will expedite this process,” he adds.
HSBC’s interaction with China's new international payments system has also been positive, says Vina Cheung, the bank’s global head of RMB internationalization, global liquidity and cash management.
“The system has enabled us to improve the RMB payment experience for our clients and we are seeing an increasing volume of transactions going through the system,” she explains.
Cheung says neither the operating hours nor parameters of CIPS are a limiting factor, explaining: “If you compare the two systems, CNAPS only operated from 9am to 5pm whereas CIPS can process transactions between 9am to 8pm, which means it also covers part of the European working day.”
Underlying transactions are subject to the relevant national regulatory regime as well as banks’ infrastructure – for example, how the participating banks route their RMB payments: whether they use CNAPS, RMB-clearing banks or CIPS directly.
Speaking at a conference in July, PBoC deputy governor Chen Yulu said the central bank was planning a second phase of CIPS as part of plans to enhance international monetary and financial policy cooperation and coordination.
A Renmin University of China/Bank of Communications report issued the same day suggested China should coordinate capital-account opening with exchange-rate reforms and comprehensive monitoring of capital flows.
A number of banks have been invited to discussions around phase two, the scope of which will include the issue of connectivity with the onshore capital markets system. The PBoC CIPS project team has not clearly indicated when the next phase of the system will go live, although participating banks anticipate it will happen next year.
“Phase-two objectives include a mixed settlement method which will save liquidity as well as improved RMB cross-border and offshore capital clearing and settlement efficiency,” says Thomson Reuters' Dalkali. “It will also be connected with other financial markets and will consider overseas participants as direct participants.”
He suggests there is no need for the use of CIPS to become mandatory for all renminbi cross-border transactions, as the limitations of CNAPS in terms of operating hours and payment messages not adhering to international standards will ensure this happens without central-bank intervention.
There is room for China to consider further extension of the CIPS operating window and alternative mechanisms – such as netted settlement – to enhance liquidity efficiency for CNY clearing, concludes Standard Chartered's Au.
“Future plans could focus on the further extension of the operating window and settlement mechanism for liquidity efficiency, especially when the RMB will be included in the IMF’s reserve currency basket from October,” he says.