In July, the People’s Bank of China (PBC) officially launched a Domestic Foreign Currency Payment System (CDFCPS), aiming at meeting the demand of commodity and service trade for safe and efficient foreign currency payment services. The system is the first RTGS-based multi-currency foreign currency settlement system for banks, domestic banking financial institutions and other foreign currency clearing organizations.

The Hong Kong dollar payment service was launched on April 28, 2008, followed by the launching of seven other currencies such as the GBP, the Japanese yen, the euro and the US dollar. At present, 11 banks operating nationwide have become the first participants of the System.

Background:

The Regulations on the Foreign Exchange System banned the circulation and settlement of foreign currencies in China. Because China’s capital account is not yet fully liberalized, the existing foreign exchange system permits foreign currency settlement of some trade items when certain conditions are met. In accordance with the Provisional Regulations on the Administration of Domestic Foreign Exchange Transfer, eight items including miscellaneous expenses, freight and insurance premium related to foreign trade, and inter-bank lending and fund transfer can be denominated and settled in foreign currency. In the absence of a centralized inter-bank foreign currency payment system, inter-bank foreign currency clearing and settlements are made through overseas corresponding banks, domestic corresponding banks and the intra-city foreign currency clearing system run by the SAFE, and the process usually take 1 to 3 days.

The problems in these arrangements for foreign currency payment in China include:

• Decentralized capital deposit, low settlement efficiency, relatively high settlement risks and costs fail to meet the demand of domestic commodity and service transactions for safe and efficient foreign currency payment services.
• Because small- and medium-sized Chinese banks entrust domestic corresponding banks to settle foreign currency, this cannot effectively protect clients’ commercial secrets, resulting in customer loss and detrimental to fair competition among banks.
• Domestic foreign exchange transactions being settled by external institutions pose a threat to China’s financial information security.
• In an attempt to address these problems, the PBC decided in February 2007 to take the lead in establishing the CDFCPS after thorough research and feasibility study.

The CDFCPS has the following characteristics:

• It can process payment and settlement in 8 currencies, namely the US dollar, the Hong Kong dollar, the Japanese yen, the euro, the Australian dollar, the Canadian dollar, the GBP and the Swiss franc.
• It adopts the Y-shaped message flow structure. The PBC’s China National Clearing Center (CNCC) is responsible for receiving, clearing and transmitting payment instructions of CDFCPS participants and chartered participants, and proxy settlement banks carry out settlement as per instructions.
• The System adopts a structure featuring “one access and one account settlement”. Banks connect to the CDFCPS in the capacity of either legal persons (for Chinese banks) or domestic managerial banks (for foreign banks with operations in China) through one single interface. Only one settlement account is opened for one currency with the selected proxy settlement bank. CDFCPS participants manage fund in a centralized manner of settlement between initiating branches and receiving branches in their own intra-bank systems.
• Participation in the CDFCPS is market-oriented and non-mandatory.
• International standards and norms are referred to in the management and oversight of the operational process and systemic risks.

In order to forestall risks, the PBC issued a series of regulations such as the Administrative Measures on Domestic Foreign Currency Payment System and the Administrative Rules on Proxy Settlement Banks in China’s Domestic Foreign Currency Payment System to comprehensively prescribe the rights and obligations of parties concerned in relation to access admission, risk management, settlement arrangements and charge. The PBC supervises the CDFCPS participants, chartered participants, proxy settlement banks and the CNCC to ensure safe, uninterrupted and efficient operation of the CDFCPS.

Qualified proxy settlement banks in the CDFCPS include:

• Industrial and Commercial Bank of China (ICBC): for euro and Japanese yen,
• Bank of China: for US dollar,
• China Construction Bank: for Hong Kong dollar,
• Shanghai Pudong Development Bank: for pound sterling, Canadian dollar, Australian dollar and Swiss franc.

Source: The People’s Bank of China