April 05, 2022

Why China’s CIPS Matters (and Not for the Reasons You Think)

By Emily Jin

Payment systems are the plumbing of international finance. As the U.S. and its allies block Russia from a major part of global financial plumbing, China’s Cross-Border Interbank Payment System (CIPS) has been receiving increasing attention. Many observers have wondered whether CIPS and other Chinese channels could provide a replacement not just for trade with China but also for transactions with other countries. For now, this looks like a stretch. But over the long term, participation in CIPS might be an indicator of China’s growing financial power.

CIPS is not China’s carbon copy of SWIFT (Society for Worldwide Interbank Financial Telecommunication) as they have core technical and contextual differences (see Figure 1). Technically, CIPS clears and settles renminbi (RMB) transactions, whereas SWIFT is a secured messaging protocol that lets banks “talk” to one another. Contextually, CIPS was created to improve the efficiency of RMB transactions, whereas SWIFT was created by institutions from the U.S., the European Union and G-7 countries to enhance global financial messaging.

Chinese policymakers have to contend with a policy paradox—China wants CIPS to be connected to the world yet also be a viable alternative to existing financial institutions.

SWIFT and CIPS play different roles in international finance. SWIFT is a global secured messaging system that allows banks to communicate with each other with high efficiency and low costs. It does not move funds. Instead, it facilitates the secured flow of financial information across borders to support transactions. CIPS, by contrast, is an RMB clearing and settlement mechanism (clearing entails movement of funds from institution A to institution B, and settlement is the finalization of moved funds). In the scenario where user A wants to send funds to user B across borders, there are various options. If their banks are in the SWIFT network, then their banks can communicate with one another via SWIFT codes to complete the transaction frictionlessly. If one of their banks is not in the SWIFT network, then the transaction will need to go through intermediary banks in the SWIFT network, which increases the time and cost of the transaction. CIPS is different from SWIFT, as it is an RMB clearing and settling institution that utilizes SWIFT messaging to facilitate RMB transactions with the rest of the world. China’s CIPS is more similar to the United States’ Clearing House Interbank Payments System (CHIPS), which clears and settles domestic and cross-border U.S. dollar transactions and is plugged into SWIFT for cross-border messaging.

Read the full article from Lawfare.

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