In its push to further internationalize the yuan, the Chinese government has enlisted HSBC’s Hong Kong unit to join its worldwide interbank payment system as a direct offshore participant. It’s the next step in China’s promotion of its Cross-Border Interbank Payment System (CIPS), which it has touted as an alternative to the globally dominant Swift payments system. Nevertheless, CIPS is a partner of Swift and uses its messaging service to facilitate international payments.
CIPS was set up in October 2015 as a settlement and payment clearing system for transactions that use the yuan. The system is overseen by China’s central bank but is run by the private company CIPS Co. Ltd., based in Shanghai.
The yuan currently ranks fourth in global payments. The Chinese government would love for it to challenge the U.S. dollar, still by far the world’s most widely used currency.
Hong Kong’s Role
Hong Kong has been a key part of China’s developmental strategy for some time. Having HSBC on board will make payments faster and cheaper for overseas companies that want to trade and invest using China’s currency.
Cross-border payments are not the only role Hong Kong has played in China’s economic outreach. Earlier this year, the Hong Kong Monetary Authority and the People’s Bank of China announced that residents in Hong Kong will be able to use the digital yuan, also known as e-CNY, for cross-border transactions. This marked the first application of the central bank digital currency outside mainland China.
China’s National Financial Regulatory Administration has also begun to encourage banks and insurance firms to issue yuan-denominated bonds and list shares in the Hong Kong Special Administrative Region. On top of that, Chinese mainland companies have been encouraged to set up their global or regional headquarters in Hong Kong.
But the growth of the yuan in cross-border transactions has also been driven in large part by Russia. International sanctions prevent major Russian banks from using the Swift international payment system, a result of the ongoing invasion of Ukraine. This has left Russia increasingly turning toward the Chinese yuan for cross-border payments. According to the Russian Central Bank, Russia has invested 139.6 billion rubles ($2.28 billion in yuan) this year alone.
