Is China’s Cross-Border Inter-Bank Payments System A Bust?

This is how the yuan enters the international stage: not with a bang, but a whimper.

China’s central bank launched an international payments system this week, in a move to challenge the U.S. dollar’s dominance in cross-border trade. The Cross-Border Inter-Bank Payments System, or CIPS for short, allows for yuan-denominated payments across a variety of transactions, ranging from financing to direct investment to cross border transactions, as mentioned, and remittances.

Through a consortium of 19 financial institutions, 11 of them Chinese companies, and the remainder of them Chinese subsidiaries of international companies, the payments system operates 11 hours a day.

Yes, 11 hours a day.

That’s a bit of a downer, at least initially, in a payments world that increasingly prizes an always-on, always functioning marketplace where transactions get done in real time. The debut of CIPS had been anticipated to help facilitate onshore transactions in China, and in part level the playing field for the yuan to compete as a currency attractive across a range of international payments.

Yet as it stands now, CIPS is only operating out of Shanghai, between the hours of 9 am and 8 pm local time in Shanghai, noted the South China Morning Post on Friday. And the clearing activity only covers the Asian Pacific and European regions. The U.S. is not covered, at least not initially, and obviously the 24-7 platform that would bring the U.S. and China a bit closer together in terms of currency may be a ways off.

Even the level of clearing fees associated with CIPS has not yet been disclosed. That makes it difficult to ascertain whether there is a financial boon in place for companies using the system, versus the fees that Chinese banks, which enjoy near monopoly status in various markets, charge.

The attraction to the system thus far is that companies outside of China should, and will (if all goes according to plan) clear transactions directly with companies operating inside of China, which might reduce friction in payments.

Previously, and still (given the limited release of CIPS), cross-border transactions involving the yuan must be done through offshore clearing banks in countries such as Hong Kong, the U.K. and Singapore. That means extra steps in transactions, and even difficulties presented through language barriers, Reuters reported in March.

The institution of CIPS also has another leg of strategy for China, the Financial Times reported Friday. China is looking to shore up defenses against U.S. spy agencies that typically have access to the Belgium payments platform known as SWIFT, a network that is used globally to send secure payments from banks and which typically tracks international payments.

In the meantime, it looks like China and CIPS has some work to do. With a somewhat hobbled system in place, it remains to be seen whether the tremendous value add – namely, securities transactions and other capital-intensive transactions – will be realized at some point.

For now – with the caveat that it’s only a few days in — the CIPS seems a compliment to the existing patchwork of transaction clearing, rather than a replacement.