Bank of China owns nine of the 18 authorised yuan clearing banks worldwide. Photo: AFP

NewCIPS to break Chinese banks' global monopoly over yuan clearing

Launch of the China International Payment System will see roles of Chinese lenders and Hong Kong in global yuan trading diminish in clearing

The launch of the China International Payment System (CIPS), scheduled by the end of the year, is set to break Chinese banks' global monopoly over yuan clearing, experts said on Thursday, with the added benefit that the gap between the yuan's onshore and offshore rate could converge.

However, Raymond Yeung, a senior economist at ANZ, said the transition would not be a smooth process.

"We cannot predict the adoption rate for CIPS," he said. "But if the system can measure up in sophistication against existing global payment systems, the Chinese banks' current monopoly over offshore yuan clearing will break. The Hong Kong yuan clearing bank will see its role fade out. Also, as yuan payments could be sent directly onshore, Hong Kong's relevance in the context of the yuan will drop."

At the World Economic Forum in Dalian on Thursday, Premier Li Keqiang confirmed that CIPS was on track, quashing concerns in the banking community since July that the system might be delayed or become watered down because of technical challenges.

With the launch, international banks will be able to settle onshore with the automated system at all hours.

Yuan banking sources said international central banks such as Banque de France were not shy about letting their suspicions be known when mainland Chinese banks were appointed exclusive clearing banks in the 50-plus yuan hubs. Foreign banks must group their trades and disclose confidential transaction details to the Chinese banks, which have the exclusive link to route the trade back to the China National Payment System (CNAPS).

Bank of China owns nine of the 18 authorised yuan clearing banks worldwide. In the first half of this year, its clearing volume grew 31.6 per cent to reach 148.1 trillion yuan. Its Hong Kong bank runs 60 per cent of global yuan settlement. It clears for 225 banks and 2,000 overseas institutions. Industrial and Commercial Bank of China ranks second, clearing for key offshore hubs such as London and Singapore.

"The development is in line with the Chinese government's target to give Shanghai the centre-stage role as an international financial hub," Yeung said. "That target was first marked down for completion by 2015, now 2020."

Under the world order for global payment systems, there are three systems handling money flows. The US has its Fedwire and CHIPS systems, while Swift has supremacy in Europe and the rest of the world.

A key factor for CIPS' success will depend on compatibility with the other global systems. Swift and a confederation of banks - both Chinese and global - have advised the PBOC on CIPS' founding over the past year.

Hao Hong, the chief strategist at Bank of Communications International, said: "13 trillion of yuan liquidity today still predominantly resides within the mainland. Hong Kong as an offshore hub has gathered only 1 trillion yuan. How do you internationalise a currency without a system that could allow the smooth flow from onshore to offshore, and the other way? The offshore yuan today, for example, is trading at 6.40 [to the US dollar], while the onshore rate is at 6.37. With CIPS now available, the gaps over these rates are set to see convergence.

"Under the existing arrangement, clearing banks consolidate transactions around the world, sending trades to be settled centrally with the People's Bank of China. There are liquidity, settlement time and quota issues between the different connecting points. There are layers of controls. Global banks can now have the flexibility to control what they want to convert even when they are outside Beijing's trading hours."

The process should make the yuan more democratic and increase foreign bank participation. Beijing still has control over its volatility, as the daily trading band allowed for the yuan is limited to just 2 per cent.

DBS economist Nathan Chow said: "The role of clearing banks had quickly faded after the emergence of CHIPS in the US. China has not yet fully liberalised its capital account. Whether the same attrition process may play out in the Chinese system, we will have to wait until the technical details of CIPS become available to find out. There will be a transition period before CIPS takes over the dominant role."

This article appeared in the South China Morning Post print edition as: CIPS to end China bank clearing monopoly