RMB Clearing: Navigating On and Offshore

The move towards RMB internationalization began in 2010 and is rapidly accelerating — it has no reverse gear. This year it’s even more important that financial institutions remain up-to-date with ongoing developments, seize opportunities as they arise, and position themselves to provide superior service to their customers. J.P. Morgan’s RMB expertise can help Financial Institutions keep pace with new developments.

One Currency, Two Markets

Last year’s growth in RMB trade settlement and the issuance of RMB-denominated bonds by the Chinese government and corporates have created important new liquidity channels and market depth in both the onshore (CNY) and offshore (CNH) RMB markets.

The CNY and CNH markets remain separate, with distinct regulatory landscapes and product offerings. However, onshore CNY can be converted into offshore CNH through a variety of routes that have been opened through the RMB internationalization process.

The CNH market, i.e., the deliverable CNY market offshore, is the most visible result of the success of RMB internationalization, with rapid growth in the development of CNH products and global RMB centers alongside Hong Kong. Capital account flows are also being opened up, allowing RMB to be circulated back to the mainland.

Increased liquidity and market depth is encouraging financial institutions and their clients to seek new financing, investment and risk management opportunities in both markets, and enables banks to support their clients’ RMB business requirements in and beyond China.

J.P. Morgan’s Global RMB Handbook provides a comprehensive guide on how best to take advantage of these opportunities, either as a bank supporting clients’ trade with counterparties in China or as a non-bank financial institution seeking to leverage new opportunities in China. This article will focus on the RMB cash-clearing infrastructures.

Onshore Clearing Infrastructure

In mainland China, RMB is cleared domestically via the China National Advanced Payment System (CNAPS). This Central Bank-operated RMB clearing system provides both real-time gross settlement and net settlement via two modules:

• High-Value Payment System (HVPS) is a real-time gross settlement for high-value (over RMB 50,000) or urgent payments. All cross-border RMB flows are cleared through HVPS regardless of amount. Payments are processed continuously from 08:30 to 17:00 on China working days.
• Bulk Electronic Payment System (BEPS) is a netting and batch clearing system for low-value (< or = RMB 50,000) payments. The netting calculation runs 24 hours, 7 days a week, but settlement takes place 6 times a day at the national processing center and 3 times a day at the city clearing processing centers, from 10:00 to 16:00 during China working days.

To have direct access to CNAPS, a bank must have a settlement account at a branch of People’s Bank of China (PBOC), China’s central bank. See Figure 1. All banks in China that are approved to provide RMB services are eligible for direct access.

Data Source: People’s Bank of China

Figure 1. China National Advanced Payments “CNAPS” Clearing Flow Chart

CNAPS requirements differ from international standards (e.g. CHIPS and Fedwire) in several respects. Some of the distinguishing features are:

International payment formatting standards:
CNAPS is not SWIFT-based and formats therefore differ from SWIFT guidelines. CNAPS Generation 2, to be rolled out in 2013 – 14, will be based on international standards

Charging mechanism:
All payments are treated on a BEN basis as CNAPS does not offer other charge indicators.

Local language:
CNAPS has dual language capabilities to support beneficiary names in Chinese. SWIFT FIN is based on Roman characters, making it difficult to use SWIFT for all payment types. Use of Roman characters in beneficiary names is increasing, however, there is still some way to go to achieve full efficiency.

Straight through processing (STP):
It is not yet possible to achieve end-to-end STP as banks are required to add specific codes noting the purpose of each payment cleared through CNAPs. Beneficiaries are not able to receive proceeds until supporting documentation is provided.

Payment returns:
Payments are commonly returned net of beneficiary deduction. J.P. Morgan’s Global RMB Handbook provides guidelines to assist with managing these payment returns.

PBOC has announced the launch of a new payment system called China International Payment System (CIPS) which will be available at the end of 2013/2014 for cross-border RMB settlement. CIPS will be SWIFT-based and modeled on the U.S. CHIPS clearing, including integration with CNAPS modeled on Fedwire.

Offshore (Hong Kong) Clearing Infrastructure

Hong Kong was the first market to support an RMB clearing system outside mainland China. The RTGS in Hong Kong, the Clearing House Automated Transfer Service (CHATS), is a multicurrency clearing system offering services in HKD, USD, EUR as well as RMB. These services include ¹:

• RMB interbank funds transfers
• Delivery versus Payment for RMB-denominated bonds
• Automated remittance of RMB funds relating to issuance of RMB bonds

Figure 2 depicts how banks settle transactions within the Hong Kong market and facilitate trade settlement into China.

Figure 2. Sample RMB RTGS payment flow

The key distinctive features of CHATS compared to other RTGSs, such as CHIPS in the US, are as follows:

Intraday liquidity management:
To maintain efficiency, Hong Kong member banks are required to release and settle no less than a certain percentage of the total day’s value of RMB payments by 13:30 and 16:30 Hong Kong time. Only critical payments may settle on a real-time basis.

Counterparty risk management:
Since the settlement institution for CHATS is a commercial bank, clearing participants need to manage commercial bank settlement risks.

Access to liquidity:
As settlement accounts are maintained with the appointed clearing system, access to central bank liquidity is indirect.

Operating hours:
CHATS operates across extended hours (08.30 to 23.30 Hong Kong time) to support markets in Asia, Europe, U.S. and Africa for RMB payments and settlements.

Funds transfers between different RMB accounts are allowed without restriction in Hong Kong.

Figure 3 provides more comparisons of the features of CNAPS, CHATS, CHIPS and Fedwire:

Figure 3. Comparison of RMB Clearing Systems vs. CHIPS and Fedwire

J.P. Morgan’s RMB Expertise

RMB experts will be pleased to address your questions, provide timely and comprehensive updates on key regulatory changes, share their experiences and help you to create and deliver a competitive, forward-looking strategy and solution set. Please speak to your J.P. Morgan Treasury Services representative.

¹ hkicl.com.hk