The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Emily Jin – research assistant at Center for New American Security and co-author of “China’s Digital Currency: Adding Financial Data to Digital Authoritarianism” (CNAS 2021) – is the 316th in “The Trans-Pacific View Insight Series.”
Explain China’s Cross-Border Interbank Payment System (CIPS).
China’s Cross-Border Interbank Payment System (CIPS) is a payment pipeline that clears and settles domestic and cross-border RMB transactions. While it can facilitate RMB transactions between Chinese Mainland institutions and between Mainland and Hong Kong institutions, it needs to be connected to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to communicate with international financial institutions. It is therefore dissimilar to SWIFT, unlike many comparisons suggest, and more like the United States’ Clearing House Interbank Payments System (CHIPS), which clears and settles U.S. dollar transactions.
Compare and contrast the scope and scale of SWIFT and CIPS.
SWIFT dwarves CIPS in scope and scale. The former, launched in 1977 to ensure secure messaging between global financial institutions, has 11,000 participating institutions in 200 countries. The latter, established in 2015 to clear and settle onshore and offshore RMB transactions, has more than 1,200 participating institutions in 103 countries. The two also differ in their functionality, as SWIFT is a global secured messaging system that allows financial institutions to communicate with one another. It does not move funds. CIPS, by contrast, is an RMB clearing and settlement mechanism that moves the renminbi. You can find a more detailed comparison here.
What’s the correlation between the internationalization of the Chinese renminbi and CIPS?
CIPS is not a driver of RMB internationalization. RMB internationalization will not take place until China allows for significant capital account liberalization, which must come with allowing market-determined interest rates and greater exchange rate flexibility. This will not happen in the PRC anytime soon, as the PRC refuses to accept the potential volatility that would come with capital account liberalization. Moreover, the PRC would have to encourage rule of law in its political and economic processes in addition to facilitating basic capital account convertibility, or else foreign investors would not find the RMB appealing.
Though CIPS is a pipeline that would facilitate RMB transactions, it will only be useful if the RMB is already an attractive currency for market participants to use to trade, invest, borrow, and invoice.
However, assuming down the line the PRC alters its policy and makes painful political and economic changes so that the RMB becomes a more desirable currency – at that point, CIPS could just become the pipeline that further internationalizes the RMB. This would have to be many years in the making, which means CIPS will have had years to fine tune its functionalities if the RMB becomes much more appealing.
How might Russia benefit from CIPS in the near and long term?
In the near term, CIPS cannot really offer Russia much relief. CIPS only processes RMB transactions. Only in a scenario where Russia and China are settling direct trade using the RMB, and the parties involved use banks that are part of the CIPS network, would CIPS be useful to Russian entities.
And that size of the pie is small. In 2020, the RMB only accounted for 6.3 percent of total Russia-Chinese bilateral payments. Likewise, in the long term, CIPS would only benefit Russia significantly if the RMB becomes a much more internalized currency.
Assess how Western governments would react to CIPS as an alternative option for Russia.
Western governments need not be too concerned, as CIPS has a much smaller footprint than SWIFT. Given the centrality of the U.S. and major allied countries in global commerce and technological supply chains, their combined sanctions power is enough to compel actions from Russia. Even if the PRC continues to provide financial relief to Russia in the international financial system – not through CIPS but through Chinese-Russian currency swaps and approving RMB-denominated transactions (which do not fall under U.S. and allied sanctions) – it does not begin to alleviate Russia’s pain from all sanctions.
Nevertheless, Western governments should keep an eye on the participation of foreign banks in CIPS. An uptick in foreign participation may signal an increasing acceptance from non-U.S. countries of China’s alternative financial pipeline. Although so far, there is very limited foreign institutional participation in China’s payment pipeline.
Western governments should flag even a mildly successful expansion of the RMB. Because if the RMB becomes a more attractive asset, then CIPS, eCNY [the digital yuan], Blockchain-based Services Network (BSN), and many other traditional and emerging financial mechanisms could get China to a position of strength to challenge leaders in the global financial order.