What was the objective?
CIPS is intended to be used to support cross-border goods and services trade settlement, direct investment, and financing and individual fund transfers.
Officials at the launch described the system as a “payment superhighway”. China has been making huge strides in opening up its financial markets and seeking global integration. A key part of this effort is encouraging use of the renminbi by a wider range of institutions; streamlining clearing and settlement will support this aim.
Who is using the system?
There are two types of designated participants. Various international and domestic banks are direct participants to the system, including BNP Paribas (China) Ltd. Direct participants must open nostro accounts with CIPS Shanghai Ltd. Indirect participants (including BNP Paribas HK) can use CIPS through one of the direct participants. Up until the end of the second quarter of 2018, CIPS promoted 31 direct participants (incl. 12 foreign banks) & 745 indirect participants. Numbers using the system are widely expected to increase over time.
Why was it needed?
Previously, the processing of renminbi globally was carried out over a patchwork of networks, creating difficulty in STP and reliability, and adding costs to transactions. In addition, the SWIFT network that is universally used for global payments did not support Chinese characters, causing a further connection issue with China’s domestic interbank clearing and settlement system, the China National Advanced Payment System (CNAPS).
Prior to CIPS, cross-border renminbi clearing could only be conducted through one of the clearing banks in the offshore hubs or through a correspondent bank in China. As usage of the renminbi has rapidly increased, demand for easier settlement options and more liquidity have grown accordingly.
What does CIPS mean for SWIFT?
SWIFT remains at the center of the global infrastructure for financial payments. CIPS seems likely to serve as a complementary offering as it operates using the same standard messaging syntax to enable easy adoption. It will use SWIFT for interbank messaging & SWIFT BIC code as its routing code, but in the future it is likely to operate independently and have its own direct communication line between financial organisations. This is also our understanding for future trend of CIPS vs. SWIFT.
What was expected?
China hoped the initiative would advance the renminbi in relation to other global currencies by reducing or removing some of the factors restricting its take-up. Alignment of payment formats and revamping the routing of payment flows assist in risk reduction and liquidity optimisation and result in more alignment to the cut-off time and operating hours of other currencies.
Who does CIPS benefit?
CIPS provides new channels for clients wanting to transact the renminbi or make payments more efficiently. Aside from direct cost and speed, clients have benefited from higher STP rates. Greater visibility on cross-border payments and collection instructions is another benefit.
Standardisation has led to more efficient operations as CIPS is aligned with the globally-used syntax ISO 20022. The system seamlessly supports Chinese and English languages.
The improvements in cut-off times have extended the operating hours for payments; particularly relevant for participants in Europe as they will be able to carry out same-day payments more easily.
How is CIPS accessed?
The PBOC has yet to give a clear indication of timing. The PBOC highly recommends that banks use CIPS for all renminbi cross-border transactions. For now, banks can still choose between the two options – CIPS or CNAPS. China regulatory body is working on a series of access mechanism to promote and monitor CIPS performance.
Click here to see full size image