Factbox: What is China's onshore yuan clearing and settlement system CIPS?

The Bank of East Asia

28/02/2022 06:42

BEIJING, Feb 28 (Reuters) - Western nations have announced a
harsh set of sanctions to punish Russia for its invasion of
Ukraine, which includes blocking some banks from the SWIFT
international payments system.  urn:newsml:reuters.com:*:nL1N2V306H
    Chinese payment-related stocks jumped on Monday as investors
wagered that kicking banks out of the SWIFT system would benefit
China's own cross-border payment system, CIPS, and accelerate
the development of the country's digital currency, the e-CNY.
    Founded in 1973, Belgium-based SWIFT is used by banks
globally for cross-border financial transactions.
    Several Russian banks are connected to China's Cross-Border
Interbank Payment System (CIPs), with one of them as a direct
participant, analysts at China Securities Co (CSC) wrote in a
research note published Sunday.
    Here's a quick look at CIPS:  
    
    WHAT IS CIPS?
    Backed by the People's Bank of China (PBOC), China launched
the CIPS clearing and settlement services system in 2015 to
internationalise yuan use. It allows global banks to clear
cross-border yuan transactions directly onshore, instead of
through clearing banks in offshore yuan hubs.
    
    WHO USES CIPS?
    CIPS processed around 80 trillion yuan ($12.68 trillion) in
2021, a 75% increase from a year ago, according to state-backed
newspaper Jiefang Daily. As of end-January, CIPS said about
1,280 financial institutions in 103 countries and regions have
connected to the system.
    They include 30 banks in Japan, 23 banks in Russia and 31
banks from African nations receiving yuan funds via
infrastructure projects under Beijing's Belt and Road
Initiative, according to a survey by Nikkei newspaper in 2019.
    CIPS counts several foreign banks as shareholders including
HSBC, Standard Chartered, the Bank of East Asia, DBS Bank, Citi,
 Australia and New Zealand Banking Group and BNP Paribas,
according to data on Qichacha, an information provider that uses
official company registration sources.
    Standard Chartered Bank (Hong Kong) Ltd said on Feb. 14 that
it has become the first foreign bank qualified as a direct
participant in CIPS outside mainland China.  urn:newsml:reuters.com:*:nB9N2T201T
    
    WHY USE CIPS?
    For now, CIPS still largely relies on SWIFT for cross-border
financial messaging, but it has the potential to operate
independently and have its own direct communication line between
financial organisations.
    For Chinese banks and corporates, CIPS can serve as a
messaging system without the risk of exposing transaction
information to the United States, BOC International said in a
report in 2020.
        
    WHAT ARE THE MAJOR CHALLENGES?
    China is Russia's biggest trade partner for both exports and
imports. In 2020, 17.5% of the trade between the two countries
were settled by yuan, an improvement from the 3.1% in 2014,
according to CSC.
    However, with the yuan still far from a key global currency,
foreign banks may not feel an urgent need for an alternative
messaging network specifically serving Chinese entities outside
of the region.
    Also, indirect CIPS participants still need to go through
SWIFT to complete settlements. A person with knowledge of CIPS
operations said that it would take time to switch from one
system to another. 
    Apart from CIPS, there are also limitations to any
alternative to SWIFT, said CSC analysts. Russia launched its own
cross-border payment system SPFS in 2014 and it was mainly used
by its domestic institutions. 
    ($1 = 6.3107 Chinese yuan renminbi)

 (Reporting by Zhang Yan，Winni Zhou and Ryan Woo; Editing by
Sumeet Chatterjee & Shri Navaratnam)
 ((Zoey.Zhang@thomsonreuters.com;))