China’s renminbi has, traditionally, not been viewed as a global currency, largely due to stringent government controls on the yuan. But that view is changing; if there is any doubt, just look at how the yuan devaluation last year rocked markets all over the planet.
The People’s Bank of China released figures late last year that found the renminbi (RMB) to be the fifth most commonly used payment currency and the second most used in trade finance.
The data was part of the bank’s 2015 Renminbi Internationalization Report, which concluded that the currency is now a mainstay when it comes to international trade, even though it still isn't entirely convertible in transactions, the bank noted.
“The RMB still has a long journey to becoming a global reserve currency,” reports said at the time. “Still, the steady rise of the RMB appears inevitable given China’s growing economic significance.”
The U.S. Federal Reserve is watching that steady rise, too.
The Federal Reserve Bank of San Francisco recently published a blog post on the currency and its role in cross-border trade and finance. Author Nicholas Borst, an analyst at the San Francisco Fed’s Country Analysis Unit, called the internationalization of the renminbi “one of the most significant developments in the global financial system in recent years.”
But there remains a disconnect, he said: While China is the world’s second-largest economy, payments made in yuan account for less than 2 percent of transactions across the globe (U.S. dollars, on the other hand, make up more than 40 percent of transactions, with euros making up about 30 percent).
What’s deterring the renminbi from internationalization? Infrastructure, Borst wrote.
CIPS Commences Operations
There is a vast list of reasons the Chinese yuan has struggled to gain prominence as an international currency, but according to Borst, it all comes down to infrastructure. The complex network of banks and clearing houses, plus the requisite for maintaining multiple foreign accounts, complex routing procedures and even time zone differentiations, means there is no synchronization between China’s domestic payment system and its capital controls.
Even so, the demand for transacting in renminbi continues to grow. Analysts found that, in the first half of 2015, more than $866.7 billion worth of cross-border payments was made in yuan.
[bctt tweet="In the first half of 2015, $866.7B in cross-border payments was made in yuan."]
Regionally, cross-border payments in renminbi are also on the rise, with about one-third of payments between China and other markets in the Asia-Pacific region using the currency, the post noted.
The value of offshore renminbi deposits is on the rise, too.
This demand has led China’s new Cross-Border Inter-Bank Payments System (CIPS) to take aim at the points of friction stunting the renminbi’s internationalization, Borst wrote. The system is a point of access for both on- and offshore banks to access the China National Advanced Payment System (CNAPS), reducing the number of middlemen the banks must go through — clearing houses, correspondent banks and the like — to settle payments.
Borst pointed to several factors that make CIPS a likely ally in the internationalization of the renminbi.
First, the system settles on a gross basis, not a net basis, reducing credit risk. CIPS uses the ISO 20022 payments messaging standard — the Fed is among dozens of institutions pushing for widespread adoption of ISO 20022. CIPS payments messages are also written in both English and Chinese, Borst explained, and implements SWIFT bank identifier codes, facilitating straight-through processing.
Finally, CIPS’ operating hours span wider than nine to five, meaning their operating hours overlap with other major time zones in Asia, Africa and Europe.
However, some analysts note that CIPS’ 11-hour day is far from adequate to meet its goals of supporting the yuan’s globalization. The People’s Bank of China has reportedly examined extending CIPS’ hours even further to remain open during business hours in North and South America, though it is unclear if, and when, that would occur.
CIPS has only been in operation since last October but already has 11 Chinese banks and eight Chinese subsidiaries of foreign banks in its network. Citibank is the only U.S. bank participating in the system, according to Borst.
The analyst added that expansion plans for CIPS operations are unclear. Still, it’s a crucial piece of the puzzle to expand China’s role in cross-border payments.
“The creation of CIPS is an important milestone on the renminbi’s road to becoming a major global currency,” Borst stated. “The fact that the renminbi has progressed so quickly, despite the underlying deficiencies in the payments infrastructure, is a testament to the global demand for the currency. CIPS seeks to rectify these deficiencies and is likely to play a critical role in the renminbi’s future growth as an international payments currency. “