The mainland recently launched the China International
Payments System (“CIPS”), enlisting an initial group of 19 domestic and
international banks. As a cross-border yuan payments system it represents a
major step in Beijing’s ambition to increase the distribution and improve the
efficiency and international popularity of its currency. But, it is more than a
payment transaction regime.
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China’s new payments system points way to de-dollarised world
Peter Guy
25 October 2015
The mainland recently launched the China International Payments System (“CIPS”), enlisting an initial group of 19 domestic and international banks. As a cross-border yuan payments system it represents a major step in Beijing’s ambition to increase the distribution and improve the efficiency and international popularity of its currency. But, it is more than a payment transaction regime.
It sets the stage for a historical monetary, economic and geopolitical tipping point. A major and decisive shift away from a US-dominated international monetary system will give way to multipolar financial power sharing. However, this change will certainly come with risk and conflict.
Today, the yuan is the world’s fourth-most-traded currency, but the transaction system that CIPS will replace is cumbersome as it requires using a series of on and offshore clearing and correspondent banks. But, CIPS is much more than that. It is Beijing’s alternative and replacement for SWIFT. De-dollarisation and the end of the US dollar’s monopoly as a reserve currency is a real possibility. And the geopolitical implications of that outcome will be unpredictable and perilous.
Suspicions that the global monetary system would become politicised and where elements of it could be used as foreign policy weapon have already occurred. SWIFT’s importance to global finance and capital movements was demonstrated when it was suspected of being used by the United States as a sanction tool against Russia.
The formation of alternative, independent systems will hasten the end of the US dollar’s status as a reserve currency
When Russian Prime Minister Dmitry Medvedev warned in January that a European Union proposal to ban Russia from SWIFT due to the conflict in Ukraine would elicit an “unlimited” response from Russia he underscored the high stakes involved. Blocking Russia from SWIFT would have crippled the country’s economy.
The entire incident gave both Moscow and Beijing the impetus to build their own secure payment messaging platforms. In 2014, SWIFT issued a cryptic press release which said: “SWIFT and its stakeholders have received calls to disconnect institutions and entire countries from its network -- most recently Israel and Russia … SWIFT regrets the pressure as well as the surrounding media speculation, both of which risk undermining the systemic character of the services that SWIFT provides its customers around the world. As a utility with a systemic global character, it has no authority to make sanction decisions.”
While SWIFT distanced itself from the source of such external pressure, it didn’t name the source of those calls. The controversy behind the scenes was probably far more intense than what was described in mainstream media. It surely provided clear motivation for Moscow and Beijing to form a parallel payments system.
The use of the US dollar and its financial processing platforms as a means of waging covert wars has given them no choice but to flee from a US centred financial market entities and payment system. Indeed, the formation of alternative, independent systems will hasten the end of the US dollar’s status as a reserve currency faster than any other factor.
CIPS will accelerate the adoption of the yuan as the primary currency of global trade and investment. While most market participants view this as a positive development, it could trigger a sudden and uncontrollable economic collapse in the US.
US President Barack Obama’s actions or inactions in Syria could very well create a power vacuum that endangers the US dollar’s status as a petro-currency. And if it loses that dominance, the US dollar and its financial instruments will gradually lose its relative attractiveness to investors. Indeed, de-dollarisation raises the prospect of a strategic default of US dollar denominated debt if it no longer carries the clout of a reserve currency.
A struggle continues over whether pipelines designated for transporting oil and gas to Europe will run from east to west, from Iran and Iraq to the Mediterranean coast of Syria, or take a more northbound route from Qatar and Saudi Arabia via Syria and Turkey. Syria is a key link because its Latakia region is important for pipeline routes and it sides with Iran and Russia.
Russia’s own version of the Great Game in Syria, through its bold entry into the country’s protracted civil war, is an eloquent and profound gambit for securing a critical strategic position for oil and gas that may one day trade in yuan rather than US dollars.
Peter Guy is a financial writer and former international banker
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