China Makes Big Move for Internationalization of Yuan

China’s international payments system, which would allow cross-border transactions in its currency Yuan, is poised to launch later this year, as reported by Reuters. CIPS (China International Payment System) would be a big step in internationalizing the usage of the Chinese currency. CIPS would further fuel the usage of Yuan by cutting transaction costs and reducing processing times. CIPS would bring Yuan on an equal footing with major global currencies like the US dollar.

CIPS is expected to use the messaging format which is also implemented by other international payment systems. CIPS is poised to replace a number of existing payment networks that had previously made remittance in the Yuan currency quite a complex process. The official launch of CIPS is expected to take place in September or October later this year.

Currently cross-border Yuan transactions take place through offshore clearing banks such as those in Hong Kong, Singapore and London, or through correspondent banks in mainland China. The emergence of CIPS would enable companies outside China to settle transactions with Chinese counterparts directly without having to go through a multi-step process. Moreover, for international companies, CIPS would solve the issue of tracking Yuan transactions, since they are processed only at certain times of day.

According to the global transaction services organization SWIFT, Yuan became one of the world's top five payment currencies in November 2014, surpassing the Canadian dollar and the Australian dollar. Globally, Yuan payments increased by 20.3 percent in value in December 2014 compared to the previous year. China has been focusing on Yuan internationalization in recent years. Currently, there are 14 clearing banks globally assigned by the Chinese central bank that can process Yuan transactions.

Earlier this year, China witnessed the launch of its first exclusively online bank, hinting at the government’s faith in privately owned lenders that can expand access to finance, especially for small-scale borrowers. WeBank, a joint venture led by Tencent, is the first private bank to start operations under the pilot program. The banking regulator in China has already granted licenses to six such institutions. An affiliate of Alibaba has also been cleared to launch an online bank, in partnership with Focus International. Considering this online banking scenario, the regulators should pave the way for online banking agreements with international financial institutions to further boost internationalization of the Yuan.