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WorldOctober 1 2014

Will CIPS soothe renminbi payment headaches?

The Chinese government and the People’s Bank of China are yet to disclose the formal details concerning China’s International Payment Platform, but there is little doubt that the new system will fundamentally change the renminbi clearing market as well as the future of offshore renminbi hubs.
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They sound like the latest rules for an obscure board game – provide an ad hoc purpose of payment and generate an identification code using an index in Mandarin for the payment counterparty. In fact, these instructions offer a glimpse into the procedure for making offshore renminbi payments to banks or corporates in mainland China.

Similarly, translating data, client names and payment details from the present Chinese payment system (second-generation CNAPS – China's National Advanced Payments System) into a Society for Worldwide Interbank Financial Telecommunication (Swift)-friendly format makes the process just as complex for China-based entities making payments to offshore counterparties.

Establishing efficient renminbi payment facilities has become vital, as trade in the currency continues ballooning outside of China. According to Swift, it is the seventh most used currency for payments, accounting for 1.57% of global payments, as of August 2014. In July this year, renminbi payments grew by 3% in value from the previous month. On a global level, all currencies increased only by 2% in the same time period.

With a promise to standardise the messaging and payment system, use a common language and offer longer operating hours, the China International Payment Platform (CIPS) represents a stepping stone in facilitating global renminbi payments and, in turn, in boosting trade in the currency further.

Seeking standardisation

It was in April 2013 that the People's Bank of China (PBOC) first announced that it would launch the CIPS, saying it would do so within two years. Since then, the platform’s opening has been postponed until further notice, but market participants speculate that it could materialise in 2016. “Establishing the CIPS might have been more difficult than regulators expected. Setting the platform up in just two years seemed pretty aggressive,” says one renminbi products specialist in London.

The delay is justified considering the technical hurdles Chinese regulators are facing. One of the main obstacles is the lack of standardisation between the Swift and CNAPS payment systems. Varying closing times across the globe, different languages, scripts, required documents and processing procedures all conspire to make present renminbi payment settlements labour intensive and time consuming.

“We need an alignment of standards otherwise this creates inefficiency for payment processing in the industry,” says Frankie Au, global head of renminbi products at Standard Chartered in Hong Kong.

Yigen Pei, treasury and trade solutions head at Citi in Shanghai, is also in favour of changes. “We require a system for global renminbi clearing,” he says. “The current system is segmented. A unified clearing centre will improve payment settlement efficiency worldwide.”

Prerequisites for foreign banks’ CIPS membership remain undisclosed. However, market participants cannot envisage a successful CIPS without a significant foreign component. “A measure of the platform’s success will be the size of international bank participation. This is really key to our clients’ benefit,” says Mr Pei.

Lost in translation

The PBOC stated that CIPS will support both Chinese and English characters. The language barrier is one of the biggest problems with the current payments system. Payment references are sometimes specified in Chinese, which means they need to be translated using Chinese commercial codes (CCC) to deliver a message in Swift format when paying offshore entities. CCCs are four-digit codes representing each of the myriad Chinese characters in existence.

“There is additional complexity when translating simplified or traditional Chinese characters into CCC and when de-coding the content at the receiving end. The same four-digit code may sometimes represent two different simplified and traditional characters,” says Mr Au.

Problems also arise when sending a payment into China. Banks need to provide a CNAPS-specific code corresponding to the Chinese recipient bank. However, these are found in a reference table that presents bank names in Chinese – a significant challenge for many overseas banks or corporates. “A public database with translations in English granting overseas access will be useful for non-Chinese clients’ reference,” says Mr Au.

Second-generation CNAPS also requires purpose of payment documentation for offshore payments into China. While Chinese firms are more familiar with this procedure, foreign clients often do not understand the categories that they need to use when classifying payments. In addition, Mr Au says various banks have different ways of asking clients to indicate underlying transaction purposes, causing further chaos.

“A solution to improve CNAPS could be to ask the party receiving the payment in China to provide payment purpose information,” he says.

Efficiency needed

The current system also complicates the clearing of renminbi. Clearing centres across the globe are growing; only in September, the PBOC designated two additional renminbi clearing banks – ICBC in Luxembourg and Bank of China in Paris.

Europe represents 10% of renminbi payments worldwide in value, according to Swift. “After the UK and Germany, we may see similar trends emerging in France, Luxembourg and even Switzerland. Announced in July, the bilateral currency swap agreement between the PBOC and the Swiss National Bank could put Switzerland in line to become a new renminbi hub in Europe,” says Michael Moon, head of payments and renminbi, Asia-Pacific, at Swift.

However, market participants lament the insufficient depth and high costs of offshore clearing centres, relative to a potential international payment platform. Comprehensive regulation and infrastructure linking CIPS to renminbi hubs worldwide will be necessary to make clearing more efficient and secure.

“The CIPS will need to enforce cautious measures on mitigating the settlement risk. Offshore clearing centres’ liquidity is one of the key limitations when clients need to clear or borrow large amounts of renminbi at short notice. Liquidity management for clearing, assessing counterparty risk, mechanism of risk sharing and continuity of business plans are key points for risk mitigation,” says Mr Pei.

Minimising risk

Clearing renminbi offshore rather than using a platform such as CIPS, which will be backed by the PBOC, also has higher risks by comparison.

“You face the counterparty's risk when you open an account with another bank to clear renminbi. The risk is lower if the counterparty is the central bank, however, since it has deeper liquidity and a better guarantee,” says the London renminbi products specialist.

In addition to minimising settlement risk, CIPS could also attract more banks into the renminbi payment and settlement business, in turn broadening the network further. Those foreign banks meeting CIPS criteria will be able to clear their own renminbi. This means a growing number of smaller, more local financial institutions could start relying on them for payment and settlement services.

“For example, as a tier-one clearing member, Bank of China New York clears US dollars for many small and medium-sized Chinese banks. The same story will apply to the renminbi,” says Huabin Wang, assistant general manager at London’s Bank of China branch.  

Opportunities remain

In offering a simpler renminbi payment system, CIPS could arguably chip away at offshore renminbi clearing centres’ market share – a potential blow for those hubs whose renminbi services have become strategic marketing tools.

London has been particularly effective in fortifying its name as an offshore renminbi market. However, Mark Boleat, policy chairman at the City of London, is unperturbed by CIPS’ advent; especially since clearing operations in London represent a small percentage of what the city’s renminbi initiative has to offer.

“The clearing bank in London is a means to an end. The end is having financial services that meet customers' needs. If CIPS means business is done directly through China rather than being cleared in London, we will not mind. Efficiency and business growth worldwide are the most important factors and will benefit the UK as well as global market participants,” he says.

To Mr Boleat, having a renminbi clearing bank in London primarily means capitalising on the growing renminbi market in Europe. The outlook for Hong Kong might be different though. He says: “What the creation of a global network of renminbi clearing banks will mean for Hong Kong is even more significant."

Yet, according to Asia-based bankers, post-CIPS Hong Kong will not lose its raison d’être. They argue demand for foreign exchange settlements and dim sum bond purchasing will continue to naturally flow into the city-state.

Details still to come

While offshore clearing volumes might drop somewhat after the platform’s launch, CIPS will unlikely cannibalise global renminbi hubs entirely. “Present offshore renminbi clearing infrastructures are similar to a city's road system, facilitating the city’s traffic,” says Mr Au. “The CIPS will provide an additional highway, making payments within the ‘city’ more efficient, across different time zones. Part of the traffic is expected to be handled directly by CIPS, but that doesn't mean the highway will replace all city roads. You still need roads to make the city work.”

Mr Pei agrees. “I think there will be scope for the CIPS and offshore clearing centres to co-exist. The market will have two layers with different roles, working together. One with local, more particular overseas clearing centres and the other will have a more international clearing system,” he says.

CIPS’s imminent launch is keeping everyone in the market on the edge of their seats, especially foreign banks, which are still unaware of the platform’s membership requirements. PBOC also has yet to clarify clearing rules, liquidity management, settlement risk mitigation, cutting time for clearing and finalised messaging standards.

Banks eager to be involved in CIPS, however, can find some solace in a central government development plan released in 2012. The white paper stated that Shanghai is expected to become one of the international renminbi clearing centres by 2015, according to Mr Pei. With Shanghai’s financial sector increasingly opening up and its free-trade zone internationalising the city further, this would appear to be a promising measure. 

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