Update on CIPS China – Impressive Progress But .

 

Back some four years ago there was a great deal of ideologically-driven hysteria from the usual sources that the creation of China’s Cross-Border Interbank Payment System (CIPS) sounded the death knell for the US dollar.

I wrote a post then that “put a finger in that optic”.

Four years later it’s time for an update.

Summary

CIPS has come a long way since 2015, but still lags US dollar cross-border payment systems. Also it lags the existing cross border RMB payment system CHATS in Hong Kong, as a forthcoming post will demonstrate.

Analysis

From 2016 through 2019 CIPS has grown remarkably both in terms of value (648%) and number (678%) of transactions.

In 1Q2020, CIPS processed 444,000 payments equivalent to US$ 1.37 trillion. It seems poised to post a 12% increase over 2019.

Over its “life” there has been an equally impressive growth in number of participants.

There are two types of participants: Direct and Indirect.

What is a Direct Participant (DP)?

It is a bank located with Mainland China that has an account with CIPS and the Chinese National Payment System (CNAPS) aka HVPS. Think of HVPS as the Chinese equivalent of the US Fedwire. These are the only banks that may directly input payments into and receive payments the CIPS system.

The DPs include foreign owned banks in the PRC. These are called "FMIs" in the CIPS “literature”

What is an Indirect Participant (IDP)?

It is a bank located in Mainland China or overseas that has a correspondent account with one of more of the Direct Participants. Note that an IDP is not restricted to working with a single DP.

The IDP sends its payment orders to its Direct Participant correspondent for input into CIPS. The DP sends the payment order into CIPS, the DP's account with CIPS is debited for the payment.  The DP debits the IDP's account on its books. 

Any CIPS credits in favor of the IDP are credited to the DP's account with CIPS. The DP then credits the account of the IDP on its books. In this respect this is a mirror of CHIPS in New York City.

What are the benefits of CIPS?

1. CNAPS/HVPS operates in the Chinese language only. CIPS allows a bank to send in an English language instruction which CIPS then “translates” into Chinese.
2. It speeds up payments. CIPS participants send their payments direct to a DP in the PRC. They do not have to work through a bank in their time zone that first processes their payment, then relays it to one or more banks for payment in the PRC.
3. CIPS is open 24 hours five days a week plus an additional four hours providing coverage in all time zones.

As of 31 December 2015, CIPS had 19 Direct Participant Banks and 185 Indirect Participant Banks with 50 countries in the world covered according to the Peoples Bank of China “2015 China Payment System Development Report” page 116.

As of 31 July 2020, CIPS has 33 Direct Participants (list here).and some 951 Indirect Participants in 97 countries, according to CIPS Participants’ Announcement #55. 

Among the Indirect Participants were 421 banks in Mainland China, 310 in the rest of Asia, 124 in Europe 37 in Africa, 26 in North America, 18 in Oceania, and 15 in South America, according to the same CIPS information.

Again an impressive change from its beginnings in October 2015.

If you’re interested in following this topic or checking AA’s math, data on CIPS performance is available in PBC quarterly and annual payment reports. You can access them here. 

Growth is very impressive. Trillions of US Dollars in payments per year sounds very impressive.

But let’s take a look at comparatives.

Based in New York, CHIPS bills itself as the “largest private sector USD clearing system in the world”. A claim supported by the average daily value of the transactions it processes.

CHIPS says that it processes some USD 1.5 trillion per day.

According to the BIS CPMI Payment Statistics for 2018, that would seem to be an understatement. Dividing the aggregate amount shown there (USD 418 trillion) by 252, the average is more like USD 1.7 trillion per working day.

Whatever the amount CHIPS processes the equivalent of CIPS yearly volumes in roughly 3 business days.

Per the same CPMI report (Table 8), CHIPS processed 115 million messages in 2018 or 82 times the messages processed by CIPS.

CIPS has made remarkable progress but still lags in US Dollar cross-border payments. And lags the HK RMB CHATS payment system.

That is not surprising.

It is relatively “early days” for the RMB as a global currency.

CIPS is a "youngster" compared to HK RMB CHATS –founded in 2007.

The US Dollar, Euro, and Sterling still dominate cross-border financial transactions with roughly a 75% to 77% share of all payment orders transmitted through SWIFT.

(SWIFT does not process payments but is a secure communication service for the transmission of financial information).

Per SWIFT the RMB generally has around a 2% share in global cross-border payment traffic.

You can see the statistics here in SWIFT’s RMB Tracker for July.

Sign up for the RMB Tracker here.

The Importance of Hong Kong to the PRC as a Global Commercial Banking Center

 

I’ve posted earlier on HK overall position as a global commercial banking center Part 1 here and Part 2 here.

Today I’ll look at the importance to the PRC of HK as a global commercial banking center using 31 December 2019 comparatives.

This will not be a comprehensive analysis but rather a set of data points.

Hopefully sufficient to convince you that HK is very important to the PRC as a source of funding.

If you’re wondering why I have “ignored” capital raising and other services, the answer is that this information is already well covered in the IMF December 2019 Article IV PIN for the HKSAR which covers trade, including re-export from/to China, equity and bond capital raising, etc. Well worth a look.

We’ll be looking at HK’s importance in terms of:

1. Cross-border transactions with the PRC
2. Mainland related non-bank transactions as defined by the HKMA.

Summary

1. Hong Kong is responsible for more than 40% of the cross-border financing provided to the PRC by commercial banks.
2. Its share is 5x that of the second largest cross border financing country.
3. The amount HK provides to the non-banking sector under HKMA’s wider “Mainland” related standard is 3.4x the cross-border financing it provides that sector.
4. Based on the above, HK is a critical source of funding to the PRC.

Sources

The sources for this analysis are the BIS’s Locational Banking Statistics. (LBS) and HKMA’s Monthly Statistical Bulletin.

Technical Notes on BIS LBS

Before getting into the analysis, some comments on LBS statistics.

These are based on reporting by banks in 48 countries. The BIS estimates that the LBS “capture” 94% of total cross-border banking transactions.

LBS reporting is based on residency not nationality or ultimate ownership, both for reporting banks and their customers.

The one exception is BIS Table A4. It is based on nationality of reporting bank resident in one of the BIS LBS 48 reporting countries, irrespective of its location. That means that the claims and liabilities of all "French" banks resident in the LBS 48 reporting countries are aggregated and presented under "France".

Claims and Liabilities on countries (Tables A3, A6.1 and A6.2) are based on LBS reporting country banks” exposures to residents of the named country. 

Using the PRC as an example, LBS reporting banks’ exposure to a PRC entity in say the UK is not reflected in these statistics as PRC exposure. But rather as UK exposure. Exposure to a European company in the PRC is reported as PRC exposure.

Data in the LBS reports is not consolidated. It includes intragroup transactions. These primarily consist of bank intragroup deposit placement and loans.

Now to the analysis.

Hong Kong Has the Dominant Share in the PRC’s Cross-Border Claims and Liabilities

For this exercise, I am using the BIS Table A3-S and BIS Table A6.2 -S as of 31 December 2019.

As per Table A3-S banks in LBS countries—except for those resident in the PRC—had Claims equivalent to USD 944 billion (USD 553 billion for banks and USD 378 billion for non banks) and Liabilities equivalent to USD 779 billion (USD 523 billion for banks and USD 247 billion for non banks) to the PRC.

You’ll notice that in this table roughly USD 13 billion Claims and USD 9 billion in Liabilities are not allocated to either the bank or non-bank sectors.

In Table A6.2-A the BIS has “allocated” these two amounts to the banking sector probably for convenience. You will also notice that the positions of the countries identified do not equal Total Claims and Liabilities.

In any case, these amounts are small enough that they are not going to effect the broad conclusion. 

The following two charts set out the relative position of HK resident banks vis-a-vis the other LBS reporting country banks with significant positions.

As is clear from the above, Hong Kong resident banks dominate cross-border transactions with the PRC with Claims of USD 384 billion and Liabilities of USD 336 billion equivalent.

In terms of Claims, Japan, the second largest country counterparty, has a share one-fifth of HK. 

In terms of Liabilities, the USA, the second largest country counterparty, has a share one-third of HK’s.

HK Resident Banks’ Mainland-Related Non Bank Exposures

In 2013 the HKMA began requiring HK resident banks to report additional details of their total Mainland related non bank business quarterly.

“Non bank” means that exposure to banks is not included.

This report has a wider scope than transactions that qualify for the cross-border Table T031101. It therefore provides a wider measure of the financing HK provides the PRC.

First, it covers not only all HK resident banks but also HK incorporated banks’ subsidiaries and branches located in the Mainland.

Second, it covers a wider range of transactions. For example, if a HK resident bank lends to say Tesla USA for the specific purpose of building a factory in China, that loan is reported here.

Details of these requirements can be found in the January 2018 revision to the original 2013 Circular. If you read this you’ll see just how “wide” HKMA’s “Mainland related” definition is.

The HKMA publishes some of the data from these reports as part of its Monthly Statistical Bulletin Section 3.13 “Mainland-Related Lending and Other Non-Bank Exposures”.

With this data we can get a wider view of HK’s role in providing finance to the PRC as well as the importance of that role.

First, let’s look at total Mainland-Related lending as per HKMA’s T031301.

The first thing you’ll notice is that Mainland-Related Non-Bank Lending is some 3.4 x Cross Border Claims on the PRC Non-Banking Sector as reported in T031101.

Looking over that report you’ll also notice that the relative percent of Loans (ex Trade Finance) and Trade Finance have remained relatively constant over the 25 quarters since statistics were first published for 31 December 2013.

The averages for that period are respectively 91% and 9%. No significant difference from the 31 December 2019 shares.

Over that period, total lending has grown from HKD 2.6 trillion to HKD 4.6 trillion.

To find out which type of banks resident in HK are providing the funds, we turn to T031302.

“Local Banks” include the HK offices and Mainland Branches of banks incorporated in HK.

“Mainland Subs” are HK incorporated banks’ subsidiaries in the PRC.

“Foreign Banks” are all other resident banks in HK. For example, the HK branches of PRC banks, of European banks, etc.

The 31 December 2019 percentage shares are fairly consistent with the average shares over the 25 quarters since December 2013: 43%, 41%, and 16% respectively.

What this suggests is that there is fairly wide appetite for PRC risk. It’s not just locally incorporated HK banks and the HK branches of PRC banks that are providing financing.

Who are the borrowers? Table T031303 provides the answer.

The "Non-Mainland Entities" include foreign firms who have borrowed for a project in the PRC.  So if Tesla USA was the borrower on a loan to build a plant in the PRC, it would be included here.

Again the 31 December 2019 percentage shares are close to the averages over the 25 quarters since December 2013: 42%, 23% and 34% respectively.

There’s a good mix of business here with some 60% of lending outside of the SOE sector.

Finally, T031304 provides data on other non-bank exposure to the Mainland.

Negotiable Debt Instruments are non loan debt obligations. Think bonds, etc.

NDI purchases take the funds provided to USD 694 billion or 4x the cross-border financing provided by HK resident banks to the PRC non-bank sector.

Off Balance Sheet Exposure includes issued but undrawn letters of credit and guarantees issued on behalf of customers, irrevocable commitments to lend.

From the foregoing, it’s clear that HK plays the dominant and critical role in providing financing for the PRC.