
What is CIPS?
CIPS stands for Cross-Border Interbank Payment System or China Interbank Payment System (CIPS). It is a payment system which offers clearing and settlement services for its members in cross-border Chinese yuan transactions.
In a nutshell, it is a Chinese alternative to the dominant SWIFT, which is a financial communication platform that enables its members, which consist of over 11,000 financial institutions in over 200 territories and countries, to communicate with each other and execute financial payments between these SWIFT members.
SWIFT is used to facilitate payments, securities, and Treasury transactions across the globe. Most of these transactions are in dollars, euros, and pounds.
CIPS members include about 1,280 financial institutions across 103 countries.
The Chinese yuan accounted for 3.2% of global payments in January 2022. The US dollar accounted for 39.92%, the euro 36.56% and the British pound 6.3% in the same period.
In 2021, CIPS reported about 3 million transactions total. In 2021, SWIFT reported an average of 42 million messages per day.
What is the Purpose of CIPS?
CIPS was launched in 2015. Its economic objective is to boost international use of China’s yuan currency or renminbi (RMB) in trade settlements. It aims to provide a yuan payment and clearing system for onshore and offshore clearing markets to its participating members.
Its ultimate strategic geopolitical objective is to be independent of the SWIFT system created and controlled by Western financial institutions, which it considers to be its competitors. SWIFT is headquartered in Belgium.
Which Institutions Use CIPS?
CIPS is headquartered in Shanghai and is overseen by the Chinese central bank, People’s Bank of China.
CIPS is used by domestic and foreign banks, the Chinese central bank, as well as securities firms operating in China.
Some of its primary users are also its major shareholders. Its shareholding structure is as such:
– China National Clearing Centre, an affiliate of People’s Bank of China, owns 15.7%
– National Association of Financial Market Institutional Investors owns 7.85%
– Shanghai Gold Exchange owns 7.85%
– China Banknote Printing and Minting Corporation owns 7.85%
– China Union Pay owns 7.85%
– HSBC Holdings owns 3.92%
– Standard Chartered owns 2.36%
– Bank of East Asia owns 1.18%
How CIPS Works
Like SWIFT, CIPS provides a communication network for financial institutions to send and receive information about financial transactions on its platform.
Also like SWIFT, CIPS does not hold or control any actual funds. Its member financial institutions hold or control their clients’ funds. CIPS is simply a messaging tool for these financial institutions to exchange payment information and instructions with each other in order for them to transact between them.
In order to ease the adoption of CIPS by financial institutions that already use SWIFT, CIPS uses the SWIFT industry standard for syntax in financial messages.
Challenges for CIPS
The main challenge to the growth of CIPS as a financial communication system comes down to the Chinese currency, the reason for its creation. The yuan is not a popular currency used by individuals, businesses, and banks outside of China. This is especially true when the yuan is compared to the more popular US dollar, the Euro, and British pound.
In fact, the yuan’s value is not determined by free market forces in the foreign exchange market as with almost every single developed economy’s currency. China pegs the yuan to the U.S. dollar at a fixed rate. As such, there is a certain amount of political risk involved in executing trades or holding currency in yuan. A change in Chinese government policy can quickly change the value of the yuan.
This risk reduces the incentive for individuals, businesses, and banks outside of China to use the yuan in global financial transactions.