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
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.