The People's Money by Paola Subacchi

Author:Paola Subacchi
Language: eng
Format: epub
Tags: BUS045000, Business & Economics/Money & Monetary Policy, BUS028000, Business & Economics/Foreign Exchange
Publisher: Columbia University Press
Published: 2016-11-14T16:00:00+00:00

BUILDING A PAYMENT SYSTEM

The other key consideration for a well-functioning offshore market is infrastructure—in particular, the payment system. This is the means by which banks and firms in mainland China connect with their counterparts overseas, and, thus, it entails the conversion of the flows of renminbi into and from mainland China (an essential bridge because the China National Advanced Payment System does not support international payments). Designated clearing banks act as conduits with the onshore interbank payment system, and it is through these channels that renminbi are repatriated to China.

How does the system work? Each offshore market has its own clearing bank, designated by the PBoC. Let’s take the example of Hong Kong. Here the Bank of China (Hong Kong) is the designated clearing bank. (Other clearing banks include the Industrial and Commercial Bank of China and China Construction Bank, which are the clearing banks in Singapore and London, respectively.) The Bank of China (Hong Kong) maintains an account with the Shenzhen branch of the PBoC, into which it deposits renminbi collected from nonmainland banks that participate in the trade settlement scheme. Through the link between the onshore interbank payment system in mainland China—called the high value payment system (HVPS)20—and the offshore renminbi real-time gross settlement (RTGS) system in Hong Kong,21 the clearing bank settles renminbi payments outside mainland China. Thus, a nonmainland bank can engage with a correspondent bank in mainland China, which, in turn, clears the payment with the clearing bank, or it can engage directly with the clearing bank, or it can use both the correspondent bank and the clearing bank. In addition to taking renminbi deposits from its own customers, a nonmainland bank can obtain renminbi funds by converting or borrowing through the clearing banks or mainland correspondent banks.

The RTGS system allows cross-border payments (for example, in Hong Kong dollars and U.S. dollars between banks in Hong Kong and their counterparts in Shenzhen and Guangdong) to be settled efficiently and safely. It pays interest to participating banks, determined on the basis of the interest rate on deposits that the PBoC, in turn, pays to the clearing bank. The clearing bank is also entitled to a special membership in the China Foreign Exchange Trade System, where it can clear the renminbi positions from the exchange business of participating banks. At the end of April 2016, there were 214 direct participants in the RTGS system that were clearing transactions with a total value, on average, of 700 billion renminbi a day.22

Participating banks can set their own conditions on renminbi deposit accounts in the offshore markets. In Hong Kong, for instance, residents—such as Hong Kong identity card holders—face no limit on deposit or withdrawal amounts. They face some limitations, however, on the amount of renminbi they can exchange into Hong Kong dollars, or vice versa,23 and can remit renminbi from Hong Kong to “personal savings accounts” at banks on the mainland.24 Participating banks can issue debit and credit cards to Hong Kong residents for use on the mainland, subject to the usual maximum credit limit of 100,000 renminbi.

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