Payment Standards System SWIFT Forms Joint Venture in China

The service will govern Chinese payments, but unlikely to increase offshore yuan adoption
February 14, 2021 Updated: February 14, 2021

News Analysis

Financial messaging and international payments leader SWIFT has set up a joint venture with the People’s Bank of China’s (PBoC) digital currency arm to create a product to comply with China’s local laws, legitimize China’s digital yuan to an extent, and remove some risk of the yuan being cut off from the SWIFT system.

However, the linkage is unlikely to spur greater international usage of China’s currency, digital or paper—likely one of China’s chief intentions of the venture.

The Beijing-based collaboration, set up on Jan. 16, is called Finance Gateway Information Services Co. Aside from the Belgium-based SWIFT, other shareholders of the venture include the Cross-border Interbank Payment System (CIPS) and the Payment & Clearing Association of China, both agencies managed by the PBoC. CIPS was originally set up to expand the influence of China’s own payments system and increase internationalization, especially among countries signed onto China’s Belt and Road Initiative.

According to a post on the website of the National Enterprise Credit Information Public System, the new venture’s scope is to formulate information systems integration, conduct data processing, and technological consultancy.

Some, including the bank HSBC in a note to clients, believe that this development could increase global adoption of China’s yuan currency. Beijing and the Chinese Communist Party (CCP) have long hoped to replace the U.S. dollar as the international de-facto currency of trade, or at least increase the yuan’s inroads. China so far has been a frontrunner in central bank digital currencies, having tested the digital yuan domestically in separate trials in Shenzhen, Chengdu, and Hangzhou cities.

Goal Is About De-risking for China

SWIFT’s intentions so far seem far more prosaic.

The entity was set up to comply with local regulatory requirements governing cross-border data security, ensure that information about transactions is stored domestically, and facilitate cross-border transactions, people with knowledge of the transaction told Caixin, a mainland Chinese business magazine.

“Its services will be limited in scope and entirely focused on maintaining compliance with applicable regulations in China,” SWIFT told Caixin.

This was a necessary move from China’s perspective because the yuan wasn’t a part of the SWIFT system, which most of the dollar-based international transfers utilize. That gave the United States powers to effectively impose economic and financial sanctions against countries such as China, leading to SWIFT cutting off its currency and leaving the countries unable to send or receive payments for exports, services, or asset purchases.

It was a massive risk for the CCP during the Trump administration. The venture effectively builds an on- and off-ramp from the SWIFT system to the CIPS system, which governs yuan-denominated cross-border transfers.

Another goal of the joint venture is to impose Beijing’s rules and regulations on data monitoring and capital controls on funds utilizing the platform. These requirements have been hard to implement on existing legacy payments infrastructure.

A source close to Beijing’s CIPS told Caixin that information tagged to China’s cross-border transactions will need to first pass through Finance Gateway before connecting to SWIFT. The question is how much influence CIPS and the PBoC will have on SWIFT beyond Finance Gateway, and whether the CCP can use the system to access information on payments outside of Finance Gateway (e.g., rest of the SWIFT network).

SWIFT first set up a wholly-owned Chinese subsidiary in early 2019.

Will It Increase Yuan Adoption Internationally?

It remains to be seen how much Finance Gateway will legitimize the Chinese yuan and increase its adoption overseas, especially as the digital yuan is so close to being released.

Despite Beijing’s efforts to promote its currency, such as launching yuan-denominated overseas bonds, establishing yuan exchange linkages, and the BRI infrastructure investment program, very little progress has been made in yuan’s international adoption during the last few years.

International usage of the yuan has actually declined over the past five years. Standard Chartered Bank’s Renminbi Globalization Index, which has measured the internationalization of the yuan since 2011, plateaued in November 2015 with a reading of 2,563. In the latest reading, as of October 2020, offshore yuan usage rate was pegged at 2,224. Standard Chartered, a leading bank in the Asia-Pacific region, is thought to have some of the most comprehensive data on offshore yuan.

Another source, from SWIFT itself, paints a similar picture. SWIFT’s RMB Tracker is a monthly report on the yuan’s share of total global payments. As of December 2020, the yuan was the fifth-most-active currency for global payments, with a 1.88 percent global market share, behind the U.S. dollar, the euro, the British pound, and Japan’s yen. Its share two years earlier, in December 2018, was slightly higher, at 2.07 percent.

Finance Gateway is unlikely to suddenly change that trajectory.

At most, it will help offset the diminishing status of Hong Kong as a global financial center, due to the increasing influence of the CCP within the city. Hong Kong is currently the biggest offshore yuan settlement center.