China: CIPS to consolidate CNY as world reserve money

Moreover, CIPS may also end the monopoly of the CNY-based domestic banks, thus leaving business opportunity for foreign banks and financial institutions which are eager to invest in China. Seven of the 20 banks selected to participate in the system initially are foreign, as reported by Reuters which cites a number of sources.

About 80% of cross-border CNY 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. This is significant for foreign banks because CNY-denominated cross-border trade settlement was worth CNY 6.55 trillion yuan (USD 1.06 trillion) in 2014, more than 20% of Chinas trade volumes, up from 1% in 2010. That is expected to climb to over 50% by 2020, HSBC estimates.

CIPS is expected to roll out as early as September or October, 2015 and will replace a cumbersome patchwork of networks. CIPS is planned to accelerate CNY 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.

About 15% of CNY-denominated payments are rejected, versus a 5% rejection rate for other currencies, according to SWIFT. Bankers believe CIPS will make automation possible, bringing costs down, making using CNY more attractive for companies. CIPS will largely replace the role of the current officially appointed clearing banks. CHIPS, the US forerunner of CIPS, handles more than 90% of cross-border USD flows. This dominance came at the expense of the local and regional USD clearing systems. Nevertheless, market players believe China will keep setting up more offshore yuan hubs to showcase the CNYs rise and to help Chinese banks expand overseas.