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Understanding China’s changing payments space

Nurdianah Md Nur | Sept. 9, 2015
Luke Grubb of Latham & Watkins Singapore tells us more about the China International Payment System and how China is dealing with Internet finance.

According to SWIFT, the Renminbi (RMB) is the fifth most active currency for global payments as of July 2015, up two positions from January last year. Given its popularity as a global trading currency, the People's Bank of China (PBOC) announced its plans earlier this year to roll out the China International Payment System (CIPS). We spoke to Luke Grubb, Partner at Latham & Watkins Singapore to find out more about it. He also shared his thoughts on China's move to tighten Internet finance in the country.  

Could you tell me more about CIPS?
It is linked to China's desire for the Renminbi (RMB) to be an international reserve currency and for China itself (and the world generally) to be less dependent on the US dollars and US financial institutions.

Conceptually, it's not that different from SWIFT but its focus will be on the RMB. It is hoped that CIPS will help reduce friction in the use of RMB as a global currency, primarily by reducing the cost and time of cross-border RMB transfers, which currently need to be routed through an official clearing bank in a major financial centre. News reports have also said that rather than being used for both trading and capital transactions, CIPS will at least initially only be used for trading.

We're unaware of any official announcement on when CIPS will take effect, but various sources have claimed a September or October launch, or alternately by the end of 2015 without a more definite timeframe.

What are the risks or challenges related to CIPS that affected parties need to be aware of?
It is quite an ambitious project — take-up may be low at first as people try it out. One of the key factors behind the speed of its adoption and extent of its use will depend on how it performs technically, and how reliable it is.

Besides CIPS, the growth of Internet finance is significantly affecting China's payments market such that the PBOC recently issued guidelines to regulate it. Why is there a need for China to tighten its grip on Internet finance?
It is important to understand this in the current Chinese socioeconomic context: easy growth is history, and further growth and rebalancing of the economy is needed. However, this can be tricky given the existing structures, and the Chinese government is trying to be careful not to upset the balance. The government knows that people are nervous and wants to avoid being surprised by any kind of financial turmoil which could easily result in social turmoil. The government continues to prize social harmony as a primary policy objective.

From a consumer protection perspective, there is a concern about consumers being harmed through improperly supervised or regulated finance activities.


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