The View | China’s new payments system points way to de-dollarised world
CIPS is Beijing’s alternative and replacement for SWIFT
The mainland recently launched the China International Payments System (“CIPS”), enlisting an initial group of 19 domestic and international banks. As a cross-border yuan payments system it represents a major step in Beijing’s ambition to increase the distribution and improve the efficiency and international popularity of its currency. But, it is more than a payment transaction regime.
It sets the stage for a historical monetary, economic and geopolitical tipping point. A major and decisive shift away from a US-dominated international monetary system will give way to multipolar financial power sharing. However, this change will certainly come with risk and conflict.
Today, the yuan is the world’s fourth-most-traded currency, but the transaction system that CIPS will replace is cumbersome as it requires using a series of on and offshore clearing and correspondent banks. But, CIPS is much more than that. It is Beijing’s alternative and replacement for SWIFT. De-dollarisation and the end of the US dollar’s monopoly as a reserve currency is a real possibility. And the geopolitical implications of that outcome will be unpredictable and perilous.
Suspicions that the global monetary system would become politicised and where elements of it could be used as foreign policy weapon have already occurred. SWIFT’s importance to global finance and capital movements was demonstrated when it was suspected of being used by the United States as a sanction tool against Russia.
The formation of alternative, independent systems will hasten the end of the US dollar’s status as a reserve currency
When Russian Prime Minister Dmitry Medvedev warned in January that a European Union proposal to ban Russia from SWIFT due to the conflict in Ukraine would elicit an “unlimited” response from Russia he underscored the high stakes involved. Blocking Russia from SWIFT would have crippled the country’s economy.
The entire incident gave both Moscow and Beijing the impetus to build their own secure payment messaging platforms. In 2014, SWIFT issued a cryptic press release which said: “SWIFT and its stakeholders have received calls to disconnect institutions and entire countries from its network -- most recently Israel and Russia … SWIFT regrets the pressure as well as the surrounding media speculation, both of which risk undermining the systemic character of the services that SWIFT provides its customers around the world. As a utility with a systemic global character, it has no authority to make sanction decisions.”