Yuan banknotes and US dollars are seen on a table in Yichang, central China's Hubei province

China launched a cross-border renminbi payments system on Thursday, a big step in its drive to boost international use of the Chinese currency and protect itself from US spy agencies with access to the Swift system.

Chinese leaders want the renminbi to rival the US dollar as a global currency for trade and investment. The “redback” is now the fourth most-used currency for global payments but its share by value remains low at just 2.8 per cent in August, according to Swift.

In addition to opening its domestic capital markets to foreign investment, authorities hope that replacing the convoluted system for clearing and settling renminbi payments with a streamlined platform will promote greater use of the Chinese currency.

“As the cross-border renminbi settlement framework approaches completion, it will inevitably stimulate greater renminbi demand from market participants,” Ma Jun, People’s Bank of China chief economist, said last month.

Currently renminbi payments to and from China are slow and costly to execute. China’s domestic payments system only supports Chinese characters, making it incompatible with Swift, the secure messaging system banks use to exchange payment details. 

In mid-September the PBoC sent detailed instructions to 19 banks that will start implementing the new China International Payments System (CIPS) this month. The Chinese units of eight foreign banks including HSBC, Standard Chartered and Citibank were among those selected.

“The establishment of CIPS is an important milestone in Rmb internationalisation, providing the infrastructure that will connect global Rmb users through one single system,” said Helen Wong, greater China chief executive at HSBC.

In addition to solving interoperability issues, experts say China also wants to reduce its reliance on Belgium-based Swift, whose governance is dominated by US and European banks.

In a sign of how vital Swift has become to global finance, Russian Prime Minister Dmitry Medvedev warned in January that an EU proposal to exclude Russia from the system over the conflict in Ukraine would elicit an “unlimited” response from Russia. “If there is no Swift, there is no banking . . . relationship,” said a top Russian banker at the time.

Chart: Renminbi currency rank

Spying is also a concern. The US National Security Agency has targeted Swift as a means to track international payments, according to NSA documents leaked by Edward Snowden.

China “wants to facilitate cross-border international business transactions, but you also have to wonder if there’s another angle here,” said Gerard Comizio, chair of global banking practice at law firm Paul Hastings in Washington. 

“They’re now relying on a payments system that is highly susceptible to being accessed by intelligence agencies from the US.”

Currently most cross-border renminbi payments are routed through offshore renminbi clearing banks that the PBoC has appointed to serve Hong Kong, Singapore, London and other offshore renminbi centres. As overseas affiliates of big Chinese lenders, the clearing banks can use internal channels to recycle offshore renminbi back into China and have access to liquidity from the PBoC.

The clearing banks are crucial because China’s domestic interbank clearing and settlement system, the China National Advanced Payment System (CNAPS), does not support international payments.

“CIPS is trying to be the middleman between Swift and CNAPS. That makes the process smoother because Swift cannot talk to CNAPS,” said Raymond Qu, chief executive of Geoswift, which facilitates cross-border renminbi payments for banks and merchants. 

Chart: renminbi trade settlement

CIPS is modelled on the Clearing House International Payment System (CHIPS), the US dollar payments network that supports about $1.5tn in payments each day.

The new system will eventually allow offshore banks to participate, enabling offshore-to-offshore renminbi payments as well as those in and out of China, but the initial rollout only includes onshore entities.

CIPS will also begin by using Swift for interbank messaging, but eventually the system will have the ability to operate independently.

“In the future CIPS will move in the direction of using its own dedicated [communications] line. At that point it can totally replace Swift,” said a person with knowledge of the PBoC’s plans for CIPS.

Additional reporting by Ma Nan

Twitter: @gabewildau

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