HONG KONG/FRANKFURT, March 31 (Reuters) - China’s launch of its international payment system (CIPS) this the year should end the monopoly that China’s yuan clearing banks enjoy, giving foreign banks a share of the mushrooming yuan clearing business.
Seven of the 20 banks selected to participate in the system initially are foreign, sources told Reuters.
About 80 percent of cross-border yuan transactions are cleared through 14 Chinese clearing banks in offshore centres, with Bank of China Hong Kong handling most of that. The rest is done through correspondent banks on the mainland.
“CIPS actually puts all its members in an equal position in terms of yuan clearing, which will be a boost to foreign banks’ agent bank business since most yuan transactions are handled by Chinese clearing banks now,” said Wilson Chan, a senior consultant to the Institute of Bankers in Hong Kong.
This is significant for foreign banks because yuan-denominated cross-border trade settlement was worth 6.55 trillion yuan ($1.06 trillion) in 2014, more than 20 percent of China’s trade volumes, up from 1 percent in 2010. That is expected to climb to over 50 percent by 2020, HSBC estimates.
“CIPS creates a great opportunity for foreign banks to participate in the yuan clearing business together with Chinese yuan clearing banks which is very important,” said Julien Martin, head of the RMB Competence Centre at BNP Paribas.
CIPS is expected to roll out as early as September or October and will replace a cumbersome patchwork of networks.
Bank of China Hong Kong said it was still waiting for details of CIPS when asked by Reuters about the impact it would have on yuan clearing banks.
CIPS is planned to accelerate yuan internationalisation by creating a bigger and more diverse group of clearing banks and making yuan clearing cheaper.
Whereas current clearing channels involve different language codes and document formats in China and globally, CIPS is expected to adopt the international standard, smoothing the process.
“We’ve had complaints from banks on clearing processes as they need to manually categorize a transaction and assign a payment code, which is time-consuming,” said Ngan Kim Man, head of renminbi business strategy and planning at Hang Seng Bank.
About 15 percent of renminbi-denominated payments are rejected, versus a 5 percent rejection rate for other currencies, according to SWIFT.
Bankers believe CIPS will make automation possible, bringing costs down, making using the yuan more attractive for companies.
“CIPS will become a strong push for the yuan’s internationalisation as the unified platform will definitely create more interest in the currency,” said Martin at BNP Paribas.
CIPS will largely replace the role of the current officially appointed clearing banks, if U.S. experience is any guide.
CHIPS - the U.S. forerunner of CIPS - handles more than 90 percent of cross-border dollar flows.
This dominance came at the expense of the local and regional U.S. dollar clearing systems. CHIPS achieved it by being more efficient and providing longer operating hours, said Nathan Chow, an analyst at DBS in Hong Kong.
“Most of the clearing business globally is done at the hub of a currency. The U.S. dollar clearing hub is New York and offshore clearing banks only play a very minor role,” said a senior banker in Frankfurt.
He said the tendency of currencies would apply to renminbi as well, with offshore clearing banks becoming less important once CIPS was in full swing.
Nevertheless, market players believe China will keep setting up more offshore yuan hubs to showcase the yuan’s rise and to help Chinese banks expand overseas.
“There will still be advantages for clearing banks. If there is a payment within Europe, it doesn’t make sense to clear it through Asia,” said Bernd Meist, a managing director in the Bank of China’s Frankfurt branch, the yuan clearing bank in Germany. (Editing by Nachum Kaplan and Eric Meijer)