China and Russia have their own Swift-like systems, and while neither is likely to displace Swift tomorrow, sanctions will propel efforts to strengthen and expand them.
Might the banning of a raft of Russian banks from the Swift global interbank messaging system open doors to wider acceptance of a fledgling Chinese alternative?
Many experts believe so, although time will tell how quickly and how wide the doors open for the Cross-Border Interbank Payment System (CIPS), a brainchild of China’s central bank that’s been supporting renminbi-based settlements since 2014.
Any Russian banks and financial organizations barred from the Swift network “are likely to end up joining the CIPS network,” said James Fok, a former executive at Hong Kong Exchanges and Clearing and author of Financial Cold War. “This will provide a boost to CIPS’ international adoption.”
The ban against Russia announced this week in retaliation for the invasion of Ukraine may not mean much for CIPS in the short-term, despite a sharp rise in mainland stock prices this week among Chinese financial and IT companies working with CIPS. Investors were said to be counting on China to capitalize on Swift’s decision.
Swift is decades older than CIPS, links about 11,000 financial institutions worldwide compared to CIPS’s 1,280, mainly Asian participants, and of course facilitates a lot more than a single currency.
Moreover, CIPS operations by and large rely on Swift. Wang Yongli, a former Bank of China executive who served as China’s first director on the Swift board of directors, this week told Sina Finance that CIPS uses the Swift message system to handle cross-border capital flows.
“While growing its user base, CIPS has cooperated with Swift to make their systems interoperable,” Fok explained. “CIPS has adopted Swift’s industry standard messaging format to facilitate the integration of China’s domestic payments with the international payments system.”
CIPS thus serves big, mainly Chinese banks in ways much like the New York-based Clearing House Interbank Payments System (CHIPS) supports American banks, Wang said.
While CHIPS deals in U.S. dollars, Shanghai-based CIPS facilitates renminbi transactions as part of the Chinese government’s ongoing campaign to internationalize its currency and challenge the dollar’s dominance in global trade. CIPS is also set up to support settlements tied to China’s Belt and Road overseas trade and infrastructure-building initiative.
About 40 percent of CIPS’s participants are Chinese, with major state banks forming the core customer base. International participants include HSBC, Standard Chartered, DBS, and Deutsche Bank.
For now, CIPS is limiting its business to Chinese currency settlements through a “phase one” of a longterm growth plan. Phase two, a timetable for which has not been announced, would involve a “hybrid settlement method to fully support renminbi cross-border and offshore capital settlement,” according to its website. “Offshore capital” would include non-Chinese currencies.
The latest developments in Russia could have a significant impact on CIPS’ future, perhaps initially through closer cooperation with Russia’s small version of Swift (about 400 members), called the System for Transfer of Financial Messages (SPFS). It was developed by the Russian Federation’s central bank after the country faced sanctions for its annexation of Crimea in 2015, as part of an effort to diminish the power of sanctions.
A December report by the Hong Kong-based consultancy Dezan Shira & Associates cited “plans to integrate” CIPS and SPFS. It also said the Russian government was in talks to expand SPFS to Turkey and Iran. Tim White, a Special Advisor on Sanctions at AML RightSource, a financial compliance specialist, says Russia may seek to expand its SPFS system to other non-NATO players in light of the Swift ban, but that it would entail a massive rewiring of its systems to do that.
Fok described the interest in Swift alternatives this way: “If the U.S. is seen as abusing its control over the dollar and dollar payments systems, more countries will be drawn to using other currencies and payments and settlement systems that fall outside American control.”
That could mean more business for CIPS, although for now its users are limited to the renminbi.
“CIPS is likely to continue growing its user base and transaction volumes, as China’s trade continues to expand and as international use of the renminbi gradually increases,” Fok predicted. “Whether it becomes a serious challenger to Swift’s global dominance, however, depends largely on the US.”
Anita Hawser contributed to this report.