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China: new system a step forward on RMB internationalization

The China International Payment System is another component of the financial infrastructure for a global currency.

China’s central bank will launch the China International Payment System (CIPS) this fall. The system will be located in Shanghai and will facilitate cross-border trade settlement, direct investment, and other RMB-denominated deals. This will reduce transactional costs for RMB clearing and make such transactions easier. The international payment system is expected to expand internationalization of the RMB as China continues down the long path of market-oriented reforms.

China currently uses the China National Payment System (CNAPS), with a 2014 settlement amount of 6.55 trillion RMB, according to the People’s Bank of China. The transition to CIPS will better allow use of both Chinese and English and will run on SWIFT ISO20022 standards, consolidating a system of multiple clearing houses. The system is currently being tested among 20 banks and will be rolled out to other banks in the fall. Cross-border use of RMB is expected to rise as it becomes easier to engage in foreign currency transactions.

China has already stepped up RMB internationalization in recent years by creating bilateral swaps, expanding trade settlement in RMB, and establishing and expanding the offshore RMB bond market. The Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs allow foreign investors to trade RMB-denominated securities on mainland stock exchanges using foreign currencies and RMB respectively. The Qualified Domestic Institutional Investor (QDII) program allows Chinese institutional investors to invest in foreign securities markets. While opening up the capital account to some extent, these programs face limitations that prevent investors from expanding their reach in cross-border financial investment.

Improving the financial infrastructure for internationalization of the RMB is essential, and setting up the China International Payment System will bring China closer to having a major currency for both trade and investment purposes. With lower transactions costs, more RMB business can be carried out as market-oriented reforms unfold one by one.