By any measure, the internationalisation of the RMB has been striking. In little more than five years, the currency has gone from almost a footnote in international trade to the seventh most popular payment currency,
accounting for 1.47% of global payments
second most popular currency used in trade finance
. The pace of growth is similarly if not more impressive in the short term: as of May 2014, RMB payment volumes globally had grown by more than 120% year to date, compared with overall payment market growth of just 11%.
Similar activity growth is apparent in some offshore RMB centres. For instance, RMB clearing volumes in Hong Kong through the local Clearing House Automated Transfer System (CHATS) have already overtaken Hong Kong dollar (HKD) activity according to HK Clearing House (HKICL) clearing statistics. Finally, explicit measures of globalisation have continued to rise: Standard Chartered’s RMB Globalisation Index (RGI) reached 1,888 in June, a rise of 75.8% year on year (YoY) and 0.3% month on month.
This growth is even more impressive when one considers some of the practical obstacles associated with China-bound payments. While these were historically primarily associated with US dollar (USD) payments, many of them apply equally to the RMB. For example, the sheer size of China, combined with the fact that many cities and provinces share remarkably similar names, provides ample scope for misrouting. At the same time, a slight misspelling of the beneficiary name can also have far reaching consequences, since large numbers of people have the same family name.
In addition, payments into China typically arrive via SWIFT messages populated in English, which then have to be translated before onward transmission to the beneficiary. Tracking these payments within China is also problematic, because overseas banks often find that obtaining accurate status information on transactions from Chinese banks is difficult.
A more desirable long-term alternative is to have a payment infrastructure that is sufficiently standardised so these issues do not arise in the first place. A widespread assumption for some time has been that the China International Payment Platform (CIPS) would fulfil this role.
On the face of it, this does not seem an unreasonable assumption. However, the design of the system would need to address a considerable number of issues of detail, in addition to those outlined above. This requires substantial engagement and discussion with interested parties outside China, as well as significant additional work on associated reference data.
A case in point is the need for an industry database of China National Advanced Payment System (CNAPS) codes with bank name references in both English and Chinese to assist international participants. Another is the need for a standardised dictionary for the Chinese Commercial Code (CCC) to remedy the problem of multiple versions of the CCC codebook currently in circulation. This causes misinterpretation of characters sets between participants using differing versions, so
Standard Chartered has responded by working with the industry to establish a CCC standards group to resolve this. Nevertheless, once one adds in the difficulties that many payees have in dealing with multiple national and international anti-money-laundering (AML) lists, the scale of challenge for CIPS becomes apparent. This can be overcome once the CCC codebook is standardised and it becomes possible to align it with the Office of Foreign Assets Control (OFAC) list, especially when it contains Chinese characters which can then be represented in CCCs. This provides an opportunity for CIPS to consider expanding its governance role by automatically scanning messages on CIPS against an expanded version of the OFAC list that incorporated CCC Chinese characters.
To judge by a
recent news story
, these and other factors have not done the projected CIPS implementation timeline any favours. An original ‘go live’ originally planned for the second half of 2014 now appears to be slipping towards 2016. The challenges currently affecting the release schedule of CIPS reportedly consist of a mix of technological issues and government debate over maximum permissible access limits and how these might affect China’s capital controls.
Furthermore, the roll-out of CIPS has to be smooth if it is to engender confidence among potential users, particularly in terms of minimising RMB payment failure rates, which currently run considerably above those for the US dollar. Key to this will be allowing sufficient time for individual banks to conduct their own preparations and testing. There are very real concerns that if CIPS fails to deliver on these points it could dent confidence in RMB internationalisation.
Or something else?
Another concern more specific to CIPS is that the longer it takes to arrive, the greater the traction other RMB payment routes will have in the meantime. Some might argue that one such route – Hong Kong – has already achieved critical mass. While the opening of various new offshore RMB clearing centres has attracted considerable media attention, one has to question how many of them will ever attract meaningful volume. Why, for instance, would anyone want to open an RMB nostro account in Germany when you can directly open an account in Hong Kong – or China, where there is already scale and liquidity?
More sophisticated banks and corporates will quickly work out their most efficient routing for RMB payments and use that, regardless of the headlines about new offshore centres. In this regard, Hong Kong stands out head and shoulders from the rest as a clearing centre, with some 2000 banks using it for that purpose, resulting in the region’s dominant
72.4% share of offshore RMB clearing volume
A potential RMB show stopper
There is also a far more important issue at stake here. Despite the advantages of RMB settlement, many large corporate treasuries are concerned about not just current RMB payment failure rates, but also the more general obstacles to straight through processing (STP) of RMB payments.
A major culprit here is a recent requirement originating from upgrading the China National Payment System (CNAPS) to the next generation. This obliges those outside China sending inbound RMB payments to specify the purpose of a payment in the payment message instruction. This is a major obstacle to STP.
For example, a remitter based in Europe is extremely unlikely to have any understanding of these purpose of payment reporting requirements. There is also a lack of standards in the market as to how to specify the payment purpose information, resulting in offshore RMB clearing banks and agent banks having differing codeword requirements. This makes it even more difficult for the remitter to know which set of codewords to use, as this varies depending upon the clearing routing. A further complication is that it is also relatively commonplace for a remitter to deal with multiple banks for RMB payments.
For large organisations processing high volumes of payments, this is a potential RMB show stopper. They will take (and in some cases almost certainly already are taking) the view that it is far simpler and more efficient to pay in USD instead of RMB.
This is unfortunate, especially since various simple remedies are available. The most straightforward is to remove the purpose of payment requirements from payment messages for overseas remitters and place the reporting onus on the recipient in China, who also would be far more likely to understand the necessary codes. Another alternative would be to agree some clear form of standardisation and best market practice, so there would be a single consistent set of codewords for the market to use in order to enhance payment efficiency.
The solution is simplicity
In the final analysis, any delay in the CIPS timeline may not in itself be critical, as sophisticated participants will use the most efficient available alternative, such as Hong Kong. However, if it proves symptomatic of wider problems associated with RMB payments and if those problems remain unresolved, then the further progress of RMB internationalisation may be disrupted. Prominent among these problems is the obstruction of STP by payment purpose reporting requirements. This is both readily resolvable and should be resolved as quickly as possible.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?