July 30, 2020 / 10:52 AM / 14 days ago

FACTBOX-China's onshore yuan clearing and settlement system CIPS

BEIJING, July 30 (Reuters) - Chinese banks may have to rely on the country’s homegrown payment system for cross-border transactions if the U.S. imposes sanctions on lenders who serve officials involved in the implementation of the new national security law on Hong Kong.

One of the potential, albeit extreme, measures the U.S. could take against Chinese banks would be to cut off access to the SWIFT financial messaging service, according to a report co-authored by China’s former foreign exchange regulator published on Tuesday.

Founded in 1973, Belgium-based SWIFT is used by banks globally for cross-border financial transactions.

Here’s a quick look at China’s own Cross-Border Interbank Payment System (CIPS) that settles yuan onshore.

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 said it processed 135.7 billion yuan ($19.4 billion) a day in 2019. As of end-June, about 980 financial institutions in 96 countries and regions have used 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.

SWIFT processes around $5-$6 trillion per day, according to Nikkei, with official data showing that the yuan accounted for less than 2% of all transaction volumes through the network.

CIPS counts several foreign banks as shareholders including HSBC, Standard Chartered Bank, the Bank of East Asia, DBS Bank, Citi Bank, Australia and New Zealand Banking Group and BNP Paribas, according to data on Qichacha, an information provider that uses official company registration sources.

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.

The U.S. administration has been monitoring and retrieving information related to terrorism from SWIFT since the 9/11 attacks in 2001, citing the International Emergency Economic Power Act. It enables the U.S. to impose financial sanctions on other countries through SWIFT.

CHALLENGES AHEAD

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.

At the end of June, the yuan accounted for just 1.76% of all account settlements going through SWIFT - behind the U.S. dollar, the euro, the British pound and the Japanese yen. (Reporting by Zhang Yan, Cheng Leng and Ryan Woo; Editing by Kirsten Donovan)

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