Bank of China to lose share of cross-border yuan clearing, at least in short run

New international payments system likely to help foreign banks chip away at Bank of China's long-standing hold, at least in the short term

PUBLISHED : Saturday, 10 October, 2015, 1:11am
UPDATED : Saturday, 10 October, 2015, 9:22am

China's new international payments system, which launched with more questions than answers on Thursday, is set to help foreign banks chip away at Bank of China's long-standing hold on cross-border yuan clearing.

At first blush, the market looks like BOC's to lose. Since 2007, the bank has done the vast majority of cross-border yuan clearing. In the first half of this year alone, BOC cleared 148 trillion yuan, a 32 per cent increase on the same period the year before.

However, at what rate and to what degree its cross-border clearing business will be impacted is guesswork at best, with some analysts arguing that the new system could even boost the bank's business in the long run.

The system, called CIPS, has connected the China-incorporated branches of eight foreign banks to the country's domestic yuan clearing system, allowing them for the first time to make cross-border transactions without BOC as a middleman. Another 11 Chinese banks, including BOC, have been linked up with CIPS.

Andrew Fung, head of global banking and markets at Hang Seng Bank, said at a conference in Hong Kong this week that "the free lunch is gone" at this stage of the internationalisation of the yuan.

Speed and execution are key to the appeal of the new system. BOC's clearing services required manual processing to carry out transactions, slowing the process down and making it prone to human error.

The biggest trade finance and cash management banks, such as Standard Chartered, HSBC and Citibank, should be the main benefactors of a faster system if it works as advertised.

"They would be able to speed up processing time by a day, and given enough volume, a day's worth of float interest is valuable," said Jim Antos, banks analyst at Mizuho Securities Asia. "All of this would be taken from BOC/BOC(Hong Kong)."

Questions remain on business hours. One person said the People's Bank of China might impose some limits on transaction times even during hours of official operation.

Also, BOCHK can currently settle yuan for 20 hours a day in Hong Kong, versus the 11 hours that is offered by CIPS during the first phase of the roll-out. Industrial and Commercial Bank of China in Toronto and China Construction Bank in Chile are able to cater to clearing demand for in those time zones, during hours that CIPS is closed.

BOC has 30 per cent of its total assets and 23 per cent of its pre-tax profits located offshore, according to data from Moody's. The cross-border business has been a cornerstone of its international expansion.

Still, judging the profitability of the clearing business is nearly impossible. While the volume of transactions is well known, the rates that BOC has charged banks for clearing services and the profitability of that business have not been disclosed publicly.

In the short term, analysts agreed that the entry of new banks into the market would dilute BOC's share in yuan clearing. However, Nomura analyst Sophie Jiang said that over the long run the increased use of yuan stimulated by CIPS could bring more business to BOC.

"Its market share in global cross-border RMB settlement may decline as more choices have been offered - in line with our expectations," Jiang said in a note this week. "However, the potential boost on RMB's global use and offshore market expansion may benefit the bank."