SWIFT RMB Tracker August 2016 Issue - Further Thoughts on the Increase in RMB Usage in South Africa

SWIFT issues an excellent free monthly publication on use of the RMB in payments outside the PRC:  RMB Tracker.   As part of tracking RMB usage, RMB Tracker provides a monthly value-based comparison of the top twenty currencies so even if you're not interested in RMB usage you can track the fate of other currencies. 

You can either sign up for a monthly email or browse issues at SWIFT’s website.

The report is based on customer and bank payment orders (SWIFT MT Series 100 and 200 instructions).  SWIFT, of course, isn’t the only messaging system that financial institutions use.  However, it is widely used—probably the most widely used method for sending payment orders.  Thus, the report should give a very good indication—though more directional than precisely locational—about changes in the use of the RMB.  

The August issue focused on the Republic of South Africa (RSA).  Immediately below are extracts from the August RMB Tracker.  I've used boldface to highlight key points as well as the comments I will focus on. 

"Brussels, 24 August 2016 – SWIFT data shows that Renminbi (RMB) usage in payments in South Africa increased by 65% over the last 12 months and by 112% in the last two years, moving the country from position #30 in July 2014, to #24 in July 2016. Excluding domestic traffic, RMB payment messages increased in volume by 70% in the last 12 months. In addition, nearly 40% of RMB payments by South African institutions have been offshore payments exchanged with countries other than China and Hong Kong, compared to 16% in July 2015."

 “South Africa has experienced a major shift in RMB growth over the last two years, strengthening the country’s trade relations with China and Hong Kong,” says Harry Newman, Head of Banking, SWIFT. “The establishment of an RMB clearing centre in South Africa in July 2015, as well as Singapore’s increased use of the RMB for payments with South Africa, have been a catalyst for RMB growth in the region.”

A couple of things caught my eye.

But before I begin a technical note:  SWIFT’s analysis on the RSA is based on the change in the number (not value) of RMB payments to/from the RSA.  (Page 2).   The number of transactions is one way to measure adoption of the RMB for transactions.  However, I’d prefer analysis based on value, assuming both weren’t available.   If the volume increase is being driven by a large number of small value payments that would put a different spin on the increase figures than if the increase in number were closely tracking value.  

Why doesn’t SWIFT provide this?  They have the data.  In addition to the (free) RMB Tracker, SWIFT have a paid subscription sister publication and  presumably aren’t going to cannibalize its appeal by providing more information in Tracker.

As you read what follows, bear in mind that the lack of information on aggregate payment value constrains the analysis that follows.

Now to my comments.

As written, the report could be read to imply that South Africa has dramatically increased its RMB denominated transactions.   This is not strictly speaking the case.  Since the PBOC’s appointment of Bank of China’s Jo’burg branch (hereafter BOCJ) as the RMB clearing bank in RSA, BOCJ has marketed RMB correspondent banking services elsewhere in Africa.  The increase in volume reflects transactions from other African countries, not just the RSA.

We can find details of this activity in a February 2016 article by Yu Meng in The Peoples' Daily Online and which the South African China Economic and Trade Association relayed on its website.  I’ve highlighted the relevant portions in red and added some comments of my own in boldface blue.

"According to Bank of China, in the "first ten months of 2015, the Renminbi trade settlement and investment amount in and out of Africa (AA: that is, not just RSA) has grown 35% to 126.6 bn yuan (R254 bn).  Half the amount is facilitated by Bank of China’s Johannesburg branch (AA: Here we have a USD equivalent number.  Note BOCJ handles one-half of the aggregate value amount for Africa not just RSA) , which was authorized in July 2015 by China’s central bank, the People’s Bank of China, to serve as the clearing bank for Renminbi business, the first in Africa."

"At the moment, the Johannesburg Branch’s Renminbi service has reached more than 30 African countries, and opened 69 Renminbi clearing accounts for financial institutions in Africa."

(AA:  While we don’t have the volume of these non-RSA transactions nor the amounts, they could well account for a significant portion of the RMB payments attributed to RSA by SWIFT).

"Li, executive vice president of the Johannesburg branch, oversaw a 2.7 bn yuan (R6.08 bn) transaction on Nov 30th for a Mauritian client — the bank’s biggest single clearing deal in Africa. “We wouldn’t have even imagined a transaction in Renminbi this big last year and because of the PBoC’s authorization we expect to do more,” says Li."

(AA:  The wording is ambiguous.  It’s not clear if this was an outgoing or incoming payment.  In either case, it seems a rather large amount for single commercial transaction especially given the amount and nature of bilateral trade between the two countries. Mauritius annually imports roughly US$1 billion equivalent from the PRC – making this single payment over 40% of annual imports. 

The PRC is not among Mauritius five largest export markets.  RSA is in fifth place and annual exports are roughly US$200 million equivalent so it’s unlikely this was an incoming payment for Mauritian goods.   

Given that and the fact that Mauritius is an offshore financial center,  AA suspects that this transaction was financial not commercial.  This was a relatively large RMB transaction—apparently the largest or one of the largest in Africa.  If it is an outgoing payment, its origin may not be Mauritius.  If it is incoming ,its final destination may not be Mauritius.  

Given reports of Chinese parties engaging in “gray” cross-border transactions (AA’s euphemism of the post), AA imagines that a lot of parties might have an interest in finding out more details, particularly if this were a repeating transaction.

Second, Singapore’s increase in RMB payments to the RSA is also interesting. 

If they are trade related, that would imply that the RSA has either redenominated invoicing on existing trade or has "new" trade conducted in RMB.  If so, I’d expect that that pattern would be evident in RSA trade with other countries.  That’s based on the assumption that if the RSA is moving to a greater use of the RMB in its trade, it would be doing so with more than one country. 

That doesn’t have to be the case of course.  Perhaps, there was a unique opportunity to increase sales with Singaporean entities.  As well, the information SWIFT has provided on the increase is based on number of payments not value. 

Assuming that value is tracking to some extent the number of payments (again this need not be the case), as above, I suspect that transactions are financial not commercial.  Perhaps, BOCJ is obtaining RMB for its operations from Singapore via for example FX transactions. While ICBC Singapore is the PBOC-designated RMB clearing bank (in Singapore) and not BOC Singapore, Singapore has some 110 or so banks.  Besides local banks that are active in the RMB, the country has a variety of foreign banks including banks from the PRC (BOC has a full branch) and from Hong Kong SAR who likely have RMB-denominated business and could serve as counterparties.

China CIPS - How is It Likely to Operate?

March 2016: CIPS and SWIFT Sign the MOU

Introduction:

If you read my previous post, then hopefully you’ve accepted the argument that CIPS is designed as a payment utility (analogous to CHIPS) not as a replacement for SWIFT (a global secure messaging utility).

Thus, if CIPS is an alternative to anything, it is an alternative to currently existing cumbersome methods for parties outside of Mainland China to make and receive RMB payments.

By way of fleshing out this analogy, let’s look a bit closer at CHIPS and how it fits into the domestic US payment system.  CHIPS processes US dollar payments –largely those related to cross border transactions.  FEDWIRE and ACH (for smaller payments that are made in very large numbers, e.g., salaries) handle the bulk of domestic (US) oriented dollar payments. 

Similarly CIPS will handle internationally oriented RMB denominated payments, while CNAPS2--the local equivalent of FEDWIRE-- (primarily) will process domestic oriented RMB payments in the PRC.

Key Results of CIPS Likely Method of Operations

There are four key likely effects:  

1. Requirement that CIPS member banks be located in the PRC.  Banks around the world are not going to be connected to CIPS as they currently are to SWIFT.
2. Reliance by foreign banks wishing to use CIPS on Chinese correspondent banks. 
3. Use of SWIFT means that perceived risks associated with the use of SWIFT are not mitigated. 
4. Negative impact on existing RMB clearing banks and centers, with Hong Kong potentially hard hit.

Domestic Membership:  Like CHIPS, CIPS almost certainly will require that its members (the institutions who can directly enter payment orders into the system and who directly receive payments from the system) be in the PRC (not offshore) and have accounts with the (local) central bank (the PBOC) to settle transactions.  Credit concerns over settlement of transactions, including minimizing systemic risks to the national payment system and economy, and operational needs motivate this requirement.

Reliance on Correspondent Banks: Offshore banks that want to send payments via CIPS will have to maintain RMB accounts with Chinese correspondent banks who are direct CIPS members or with other banks who themselves maintain such accounts.  This latter option is more operationally complex and not one that many banks are likely to take -- unless they have credit concerns about maintaining large balances in accounts subject to PRC jurisdiction.   Offshore banks who want to send USD payments through CHIPS or Sterling payments through London-based CHAPS have a similar reliance on correspondents. 

Use of SWIFT by Foreign Banks: What this means then is those offshore banks are very likely going to use SWIFT to send messages to the correspondents (CIPS direct members) and receive information from CIPS members about transactions via SWIFT just as they do with CHIPS USD transactions. 

If as it  seems, foreign banks will send their payment instructions to CIPS members via SWIFT, then if sanctions or other pressure forces SWIFT to deny a Chinese bank access to SWIFT, that bank will no longer be able to receive SWIFT payment messages from foreign banks or send them messages.  

Potential Use of SWIFT by CIPS:  If CIPS direct participants use SWIFT to send payment instructions to CIPS, then a denial of SWIFT services to Chinese banks could “shut down” CIPS. 

Impact on Perceived Risks Associated with SWIFT Usage:  As I hope is evident, to the extent that SWIFT is used with CIPS, concerns about “spying” or sanctions-induced denial of SWIFT access—assuming that these really exist--are not eliminated.

But note, at this point it’s not clear –at least to AA—if CIPS will 

• rely on SWIFT for such “internal” communications or 
• operate a separate secure communication system of its own.   
• Target, the Europe-based payment system that makes euro denominated payments, uses SWIFT for this purpose.  
• CHIPS has a different model.  It relies on its own secure communication system to send payment instructions to CHIPS.   

Of the two options, I expect that China will adopt the CHIPS model, if not immediately, as soon as it can. 

Problems that both Iran and Russia faced no doubt have been noticed by PRC decision makers.   Iran’s SWIFT access was suspended --now restored in the wake of the nuclear agreement.  US sanctions restricted Russian domestic debit and credit card processing almost all of which was offshore and thus outside of Russian authorities’ control until that processing was subsequently brought onshore.  Calls by the then British PM and other EU entities for Russia to “de-SWIFTed”  threatened the potential shutdown of the country’s SWIFT-based domestic payment system with potentially devastating economic effects, causing the Central Bank of Russia to  introduce a replacement non-SWIFT-based payment national payment system.  

But I think that the Chinese need little “education” on this topic. 

Well before Iran’s or Russia’s problems, the PRC required that domestic credit and debit card transactions be processed by a domestic system. Some of this was likely motivated by a desire to promote local business as well as to limit the risks of reliance on foreigners.

Impact on Clearing Banks and Centers –Particularly Hong Kong: Finally, another often overlooked result of CIPS is the impact on offshore clearing banks. Under the current “clearing bank” arrangement designated banks outside the Mainland handle offshore and cross-border RMB transfers.  Hong Kong is particularly vulnerable as it handles roughly 70% of all offshore RMB transactions.  (Page 7)

Once CIPS is successful, Hong Kong banks (particularly Bank of China Hong Kong) are likely to experience a dramatic fall in transaction volume and fees. Customer RMB deposits are also likely to decline as deposits are shifted to CIPS member correspondent banks on the Mainland. 

Factors that could mitigate that fall are

1. the utility of offshore accounts for “workarounders’” and “investors’” currency exfiltration and infiltration transactions with the mainland, a lot of HK – Mainland trade is actually composed of regulatory avoidance transactions dressed up as trade, 
2. more “legitimate” regulatory planning reasons for maintaining offshore RMB deposits similar to those for offshore US dollar deposits, and 
3. a possible depositor preference for banks and jurisdictions perceived to be more creditworthy and offering more legal protection to depositors than those on the Mainland.