China is developing a payment system that will make it more efficient for banks to clear yuan funds across its borders, in another move aimed at promoting the global use of the Chinese currency.
The People's Bank of China, the country's central bank, is in the process of upgrading what is known as China's National Advanced Payment System, or Cnaps, to better facilitate cross-border trade denominated in yuan, according to government officials and executives at Chinese banks. The processing of yuan payments isn't at the same level of efficiency as a cross-border payment in other major currencies like U.S. dollars, with a hands-on system that often leads to high transaction costs, some observers said.
"The processing cost of yuan payments must come down, so that when corporations do start to put significant yuan volumes through, banks can handle them smoothly and efficiently," said Patrick de Courcy, head of markets in the Asian-Pacific region for Swift, which operates a world-wide financial-messaging network between banks and other financial institutions.
Mr. de Courcy said China's central bank has agreed to use messaging standards adopted by Swift to support electronic payments into its system. A central-bank official confirmed the bank is upgrading the yuan-payment system. The bank declined to comment further.
The move comes as Beijing speeds up its efforts to give the yuan a more prominent role in international trade, even as it is slowing down the appreciation of the currency in the face of weakening exports. The yuan rose 4.6% against the dollar last year and has risen 8.5% since June 2010, when China dropped the yuan's two-year peg to the U.S. dollar and pledged to make the exchange rate more flexible.
Many analysts expect the yuan to rise at a slower rate—by about 3%—this year, as China balances its need to help prop up exports with continued U.S. pressure to let the currency rise to rebalance bilateral trade. At the same time, economic woes in Europe and the U.S. have undermined market confidence in the dollar and euro, giving China an opportunity to accelerate its push for a more global yuan.
"The key story this year is going to be more about internationalization and less about appreciation," said Paul Mackel, head of Asian currency research at HSBC Holdings PLC.
Banks, both Chinese and foreign, have started to see increasing demand from their corporate customers for the clearing of yuan-denominated transactions since China started to allow cross-border trade to be invoiced and paid in its currency more than two years ago. Yuan-settled trade now accounts for about 10% of China's total trade, compared with less than 1% in early 2010. Analysts at Deutsche Bank AG predict that yuan-settled trade this year will come to 3.7 trillion yuan ($588 billion), or 15% of China's total trade.
Much of the yuan trade has been cleared through Bank of China Ltd. in Hong Kong, the only yuan-clearing bank designated by the central bank outside mainland China. Some of the trade has been carried out by commercial banks in China that act as agents for banks overseas.
A typical funds transfer works like this: A Vietnamese importer instructs its bank to pay its Chinese seller in yuan. The importer's bank will then debit its account and send a payment order to the seller's Chinese bank. The payment order is then processed through Cnaps, the yuan-payment system, and the Chinese seller's bank is credited for that amount.
But processing yuan payments into Cnaps is often a labor-intensive process. For instance, that Chinese seller's name in Chinese has to be converted to four-digit codes supported by an international messaging service adopted by Swift and back to Chinese again for processing. The yuan-payment system, once improved, will adopt the Swift standards and help smooth out the process by making it more electronic, according to observers.
"With an upgraded Cnaps, clearing cross-border yuan trades will just be like driving on a highway," said Feng Shenjiang, general manager of the international business department at China Merchants Bank, which saw its yuan-settlement business reach 114 billion yuan last year, quadruple the amount in 2010.
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