Is China Going After the Dollar?

The China International Payment System (CIPS) is expected to launch by the end of 2015, and when it does this new international payment system will effectively promote and globalize the number of transactions in Chinese yuan (CNY).

First announced by the People’s Bank of China (PBOC), the CIPS will allow users to streamline the payment process as well as reduce transaction fees.

“The CIPS is ready now, and China has selected 20 banks to do the testing, among which 13 banks are Chinese banks and the rest are subsidiaries of foreign banks,” a senior banking source said.

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The system was originally scheduled to go online in 2014, but due to technical challenges its launch was delayed. Chinese authorities are hoping to launch the first phase of CIPS before December, after completing additional testing this fall. “It’s not a plan but we are trying our best to have the first phase [of CIPS] online before the end of this year,” said a source.

Once online, the system will facilitate the clearing of payments directly to parties in China. This eliminates the need to route through offshore CNY clearing banks in Hong Kong and Singapore, or through correspondent banks in mainland China.

“Misunderstandings under the current clearing system happen from time to time due to different languages and codings. The CIPS is a breakthrough since it will offer a united platform and enhance efficiency,” said analyst Raymond Yeung of Australia and New Zealand Banking Group Limited (ANZ) in Hong Kong.

The CNY is now the fifth most-used currency for international payments, according to SWIFT. As of December 2014, 2.17% of all SWIFT payments were in CNY, earning it a place ahead of both the Canadian and Australian dollar.

And speaking of dollars, it will be interesting to see how the CIPS affects the U.S. dollar’s reserve status, which has been weakening for some time. Russia recently implemented its own payment system—an alternative to SWIFT—that has, so far, linked at least 91 credit institutions to its central bank. Will this accelerate the demise of greenbacks? Many think so. What’s more, this may be a sign of an ongoing joint effort between China and Russia to challenge U.S. dominance.

H/T: Reuters