Launch of the China International Payments System

China’s response to the SWIFT international payments system should bring good news for corporate treasurers with lower costs and more efficient settlement of transactions in renminbi

The launch of the China International Payments System or CIPS is expected in the second half of this year. If things go according to expectations, it will make the settlement of transactions with China-based business partners a much more straightforward affair than it is at present.

“CIPS will be a game-changer,” says Andrew Mitchell, the Hong Kong-based head of the Asia Capital Markets practice at Linklaters law firm. “It will boost the ability to settle renminbi internationally so that it will be much easier to access and use the currency outside China.”

If that is indeed the case, treasurers should hope that CIPS arrives sooner rather later. The growing importance of China as a trade and financial power means companies and their banks have to deal with evermore transactions in offshore renminbi.

The main advantage of CIPS is that is should cut some corners and make the settlements of payments in renminbi a less cumbersome process

According to the SWIFT international payments network, the Chinese currency is already the fifth most used in payments globally, amounting to 2.17 per cent of all transactions by December 2014. More important than that, the use of the renminbi is growing fast, as in January 2013 it ranked 13th with a meagre 0.63 per cent of the total.

The main advantage of CIPS is that is should cut some corners and make the settlements of payments in renminbi a less cumbersome process. In the current set up, companies that want to make or receive a payment in the Chinese currency need to empower their financial partners to set up accounts with authorised clearing banks in jurisdictions, such as London, Frankfurt, Singapore or, especially, Hong Kong, which have been approved by the People’s Bank of China to make renminbi settlements.

The system works well, but it creates delays for the conclusion of transactions, which could be faster if settlement was made directly with the Chinese central bank. And there are also issues related to the standards of messaging employed by SWIFT and the local Chinese clearing system, which make the whole process riskier than it should ideally be.

CIPS could help to deal with such issues by adopting messaging standards that are adapted to the SWIFT system, although it is not clear yet whether this will actually be the case. It could also provide solutions to more pedestrian problems, such as the times of the day when the settlement process will take place, which is another source of delay.

“If CIPS is implemented properly, which is what we expect, the new infrastructure itself should be invisible to corporate treasurers,” Mr Mitchell says. “But they should see the benefits of more streamlined processing and settlement.”

Jürgen Lutz, head of cash management Asia-Pacific at UniCredit, adds:  “CIPS will allow for more clearing options for banks to organise their renminbi settlements, and more choice and competition might lead to lower bank costs and eventually cheaper pricing for treasurers.

“There will be costs to using CIPS, such as making the payment system fit for CIPS format requirements, and the commercial viability of this will depend in part on the volume of international renminbi business a company does.

“We should be cautious about raising expectations as once CIPS goes live, some banks may adopt a wait-and-see approach while they consider all the details, and it will take years to build and develop the network.”