People’s Republic of China
Detailed Assessment Report: CPSS Core Principles for Systemically Important Payment Systems
Author:
International Monetary Fund
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Publication Date:
05 Apr 2012
eISBN:
9781475502992
Language:
English
Keywords:
ISCR; CR; payment system; central bank; foreign currency; settlement system; system participant; financial system; PBC payment; settlement account; payment transaction; bank draft
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The assessment report on the observance of China’s compliance with the Committee for Payment and Settlement System's core principles for systemically important payment systems is examined. Domestic foreign exchange transactions are mostly executed at the China Foreign Exchange Trade Center. Domestic payments are handled through a diverse variety of payment systems, mainly operated by the People's Bank of China, except for cards and some local clearinghouses. Real-time remittances, bills, and cheque-clearing services are widely available to the financial institutions serving the rural areas.

Abstract

The assessment report on the observance of China’s compliance with the Committee for Payment and Settlement System's core principles for systemically important payment systems is examined. Domestic foreign exchange transactions are mostly executed at the China Foreign Exchange Trade Center. Domestic payments are handled through a diverse variety of payment systems, mainly operated by the People's Bank of China, except for cards and some local clearinghouses. Real-time remittances, bills, and cheque-clearing services are widely available to the financial institutions serving the rural areas.

I. General

10. The present document is the assessment of the systemically important payment systems in the People’s Republic of China (PRC) based on the CPSS CPSIPS. The document also contains an analysis of some developmental issues related to the reform of the payments system as a whole. The assessment was conducted in the context of the first field mission of the Financial Sector Assessment Program (FSAP) to the PRC (June 2010).

11. The assessors of the CPSIPS were Massimo Cirasino and Mario Guadamillas.1 An assessment of the CPSS-IOSCO Recommendations for SSS and CCP was conducted by the same assessors on a follow-up FSAP mission in September 2010. During the September mission, the assessors were able to discuss as well some matters relevant to the CPSIPS assessment.

II. Information and Methodology Used for Assessment

12. The information used included all relevant laws, rules and procedures governing the systems, the abundant material available on the issue inside and outside the central bank.2 In addition, extensive discussions were held with regulators—PBC, Ministry of Finance (MOF), China Securities Regulatory Commission (CSRC), China Banking Regulatory Commission (CBRC), and State Administration of Foreign Exchange (SAFE); several stakeholders in the Chinese Payments System, including the big four commercial banks, joint stock commercial banks, city commercial banks, policy banks, foreign banks, and rural banks,3 funds management companies, the card operator (China Union Pay), the CFETC and securities depositories—China Central Depository & Clearing Co., Ltd. (CCDC) and China Securities and Clearing Corporation Limited (SD&C). A self assessment by the PBC of the country’s SIPS with the CPSS Core Principles as well as of the central bank’s responsibilities in applying the CPs was provided prior to the mission. The self-assessment was prepared by the PBC Payment and Settlement Department, in close consultation with the major stakeholders of the CNPS.

13. In addition to the 2001 CPSS-CPSIPS Report, the methodology used follows the Guidance Note for Assessing Observance of CPSIPS prepared by the IMF and the WB in collaboration with the CPSS in August 2001. For SSS, the 2001 CPSS-IOSCO Report on Recommendations for Securities Settlement Systems (RSSS), the 2002 CPSS-IOSCO Assessment Methodology for the RSSS and the 2004 CPSS-IOSCO Report on Recommendations for Central Counterparties (RCCP) were the references used.

III. Payment Systems Infrastructure Overview

14. In recent years, the PBC has carried out a major and comprehensive reform of the CNPS. The PBC implemented the CNAPS, which consists of the High-Value Payment System (HVPS) and the BEPS. The HVPS is the backbone of the CNPS and is a RTGS system, mainly used for large value transfers. It is used to provide fast, efficient, secure, and reliable settlement services to banking institutions, private and public entities and financial markets. Currently, the system has more than 1,600 direct participants. In 2009, the HPVS processed 247 million transactions amounting to CY 760 trillion. The complex architecture of the National Payment System in China is depicted in Figure 1.

Figure 1.
Figure 1.

China National payments System

Citation: IMF Staff Country Reports 2012, 081; 10.5089/9781475502992.002.A001

Source PBOC: China Payment System Development Report 2009.(1) Settlement figures correspond to 2009.(2) Includes cheques image system, bank draft processing for city commercial banks, payment clearing system for rural cooperatives and banks.----- Transaction or information related flow.— Settlement related flow.

15. The HVPS registered an impressive growth over the last few years, especially when compared to other systems of major economies (see Figure 2). For example, the number of transactions processed through the system increased of 24.5 percent from 2007 to 2008. The growth of the total value processed was even higher (38.9 percent). However, as shown in Table 1, the value processed by the HVPS is still relatively low when compared to China’s GDP, suggesting significant margins for further growth.

Figure 2.
Figure 2.

Percentage Growth of Value and Volumes in Selected Large Value Transfer Systems from 2007 to 2008

Citation: IMF Staff Country Reports 2012, 081; 10.5089/9781475502992.002.A001

Source: central banks for systems volumes and values; Federal Reserve Bank of New York for exchange rates; The WB for GDPs.
Table 1.

Statistics for Selected Large Value Transfer Systems in 2008

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Source: central banks for systems volumes and values; Federal Reserve Bank of New York for exchange rates; The WB for GDPs.

16. Domestic payments are handled through a very diverse variety of payment systems, mainly operated by the PBC, except for cards and some local clearing houses. The payments system backbone is the High Value Payments System (HVPS) launched by the PBC in 2005. The HVPS system currently operates in a decentralized way (multi-entry point) with a NPC and LCPs in each of the 32 provinces, autonomous regions and cities having province-level status. The HVPS system is interconnected to many trading, payments and SSS to allow for central bank money settlement. Embedded into the HVPS the PBC runs a payments systems for retail transactions (defined as <CY 50,000 as of April 2010, an increase from the previous value of <CY 20,000), the BEPS. In addition, there are numerous cheque clearing houses around the country administered by the PBC local offices or delegated to banks when the locality has not a PBC branch. CUP handles the clearance of cards transactions whose balances are settled in the HVPS. Also ACHs and other systems handle clearance and settlement for a variety of payment instruments. Figures for selected payment systems in China are presented in Table 2.

Table 2.

Payments Systems in China (Volume and Value, 2008 and 2009)

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Source: PBC China Payment System Development Reports 2008 and 2009.

Includes cheques image system, bank draft processing for city commercial banks, payment clearing system for rural cooperatives and banks.

Total volume and value of cheques issued.

17. A Cheque Imaging System (CIS) is available nation-wide. The CIS system enables electronic exchange of cheque images, automated clearing of the exchange “paper” instruments and multi-lateral net settlement of the exchange instruments at the HVPS. In 2007, over 57,000 banking institutions had commenced offering cheque imaging services, exchanging over 1.87 billion instruments amounting to CY 76.95 billion. Institutions that do not have direct access to the CIS can use bureau services offered by many of the local clearing houses and also the PBC. The PBC has also encouraged and facilitated rural financial institutions to access the CIS using bureau services offered by many commercial banks, and thereby many rural financial institutions have indirect access to the CIS. Given that there are currently 1,239 local clearing houses operating in China to handle local cheque clearing and settlement, the CIS is primarily used to clear and settle cross-region cheques. Since CIS started operations, it has been handling a steady increase of volume of transactions; in 2009, it cleared 6.93 million cheques for a value of CY 288.3 billion or on a daily average basis, 19,900 cheques for a value of CY 826 million. The ever-increasing business volume is indicative of the gradual integration of cross-region cheques into CIS.

18. CUP provides the transmission of transaction authorization order, clearing infrastructure, sets rules, takes part in pricing including inter-change fees, and acts as the counter-party for all transactions in the settlement cycle in China. The member banks issue cards, under-write merchants, deploy and operate point of sale (POS) and ATM terminals. The member banks internal payment card issuing and acquiring systems are connected to the CUP system. CUP can also act as an acquirer, and it does this in locations where it determines that the merchant and ATM network is inadequate.

19. CUP transactions are settled on a multi-lateral net settlement basis in the HVPS on a T+1 schedule. CUP maintains a settlement account at the PBC, Shanghai branch. The CUP participating member banks either have settlement accounts with the PBC directly or use correspondent banking services of a bank which has a settlement account at the PBC. Every day, at the close of clearing cycle, CUP submits a multilateral net settlement file to the HVPS, for settling transactions cleared since the last clearing cycle. CUP provides settlement guarantee for all the transactions cleared through its system, and for this it operates a settlement reserve fund, which is funded by volume and value linked contributions from participating members.

20. CUP has evolved into an international payment brand. CUP has been expanding its payment card brand to other countries. CUP has licensed its brand to banks in foreign countries and also has entered into arrangement with foreign banks on accepting CUP branded cards in their POS and ATM terminals. CUP has entered into a global tie-up with Citibank for acceptance of CUP cards at Citibank operated ATMs and POS terminals world-wide; additionally CUP has tied-up with MEPS and NETS, a payment card switches in Malaysia and Singapore respectively for acceptance of CUP branded cards at all the ATM and POS terminals of their members. Additionally, CUP is in discussions with some banks in foreign countries to issue CUP branded cards.

21. Real-time remittances, bills and cheque clearing services are widely available to the financial institutions serving the rural areas. These institutions include rural commercial banks, credit unions, rural co-operative banks; collectively these institutions have 85,000 service outlets. Thirty-one of these institutions jointly established an automated clearing house called “Rural Credit Banks Funds Clearing Center.” This clearing house provides bills and cheques clearing and online real-time remittance services to rural financial institutions and commercial banks operating in rural areas. Many rural financial institutions have automated their internal systems and also their service outlets, and are able to offer these services to the rural population from their service outlets. As of 2007, bills and cheques collection services were available in all service outlets, online-remittances at outlets in 19 provinces and draft issuance in 16 provinces. In total this clearing house handled around 3 million transactions amounting to CY 72 billion, of these there were 72,000 real-time remittances transactions.

22. Twenty one percent of rural financial services outlets are connected to the HVPS and BEPS systems. The PBC has actively strived to provide the rural financial institutions with access to the HVPS and BEPS. The PBC has facilitated the creation of a new type of institution—Village/Township banks, which are allowed direct access to these systems. PBC has also encouraged indirect access for institutions ineligible for direct access, by facilitating identification of commercial banks which can provide indirect access and where even that is not possible, PBC provides correspondent banking services to those institutions. All these efforts have enabled around 16,248 (as of end 2007) service outlets in the rural areas to have access to the HVPS and BEPS, representing 21percent of all the rural financial services outlets.

23. The FCPS, launched in April 2008, handles the clearing and settlement of domestic foreign currency denominated transactions. The FCPS is a RTGS system built by the PBC to clear and settle foreign currency denominated transactions arising out of domestic trades of goods and services. The FCPS currently handles payment transactions in Hong Kong Dollar, U.S. Dollar, Euro, Canadian Dollar, Australian Dollar, Sterling Pound, Japanese Yen and Swiss Franc (no CY transaction is accepted). The FCPS is operated and maintained by the China National Clearing Center (CNCC), with Industrial and Commercial Bank of China, Bank of China (BOC), China Construction Bank (CCB), and Shanghai Pudong Development Bank designated as its Proxy Settlement Banks (PSBs). Table 3 presents the number and value of transactions processed and their weight in terms of GDP.

Table 3.

Foreign Currency Denominated Transactions Handled by China Domestic Foreign Currency Payment Systems

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Source: PBC China Payment System Development Reports 2008 and 2009.

2008 GDP: CY 30,100 billion. 2008 year-end CY/ US$ conversion rate: 6.8434.

2009 GDP: CY 34,050 billion. 2009 year-end CY/ US$ conversion rate: 6.8282.

24. Trading of FX domestic transactions is done through the CFETS or the over-the-counter (OTC) market. The CFETS was launched in 1994 built by CFETC/National Interbank Funding Center (CFETC) to provide the interbank FX market with trading and settlement services. In 2006, trading in forward, swaps and foreign currency pairs was added. The CFETC currently operates five markets: CY/FX spot, CY/FX forward, CY/FX swap, foreign currency swap and trading in foreign currencies.4 At end 2009, there were 276 (265 banks and 11 nonbank financial institutions (NBFIs)) participants in the CY/FX spot market, 73 in the CY/FX forward, 71 in the CY/FX swap, 20 in the currency swap and 85 in the foreign currencies trading market. The mission team did not have access to detailed information on spot transactions. The Bank for International Settlements (BIS) reported a daily average trading of US$30 billion (of which US$19.8 billion are on-shore transactions) for CY/US$ spot transactions during April 2010. CFETS reported to the mission team value of transactions for CY/FX swaps and forwards for 2008 and 2009 (see Table 4). No information was provided for foreign currency pairs.

Table 4.

FX Transactions Handled by China Foreign Exchange Trade System

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Source: CFETS.

2008 GDP: CY 30,100 billion. 2008 year-end CY/ US$ conversion rate: 6.8434.

2009 GDP: CY 34,050 billion. 2009 year-end CY/ US$ conversion rate: 6.8282.

25. FX transactions among domestic operators are settled through two main methods (see Figure 3). Twenty one market participants settle their obligations on a multilateral net basis using the CFETS, The System was launched in 1994, is operated and maintained by the CFETC, and uses the HVPS to settle the CY leg and different domestic settlement banks to settle foreign currency transactions depending. The CFETC operates as CCP in the system. Risk management tools include clearing membership requirements, a clearing revolving fund and daily clearing limits among others. Settlement cycle is T+2. Novation of obligations takes place through guidelines issued by CFETS and agreements between CFETS and each clearing member. Those institutions that do not operate in the CFETS settle their operations bilaterally by settling the CY leg in the HVPS and the foreign currency leg through correspondent banking arrangements abroad.

Figure 3.
Figure 3.

China Foreign Exchange Trade System

Citation: IMF Staff Country Reports 2012, 081; 10.5089/9781475502992.002.A001

26. Regarding the use of payment instruments, China is evolving to a more intensive use of non-cash payment instruments, especially cards. The relationship of cash (M0) to GDP has been declining since the beginning of the 2000 from a level of 14.8 percent of GDP in 2000 to 11.42 percent in 2009. Bank cards issuance have been increasing at a high pace and approximately 2.07 billion had been issued at end-2009, of which 1.88 billion were debit cards. Bank cards have therefore become the primary non-cash payment instrument in China accounting for over 90 percent on the total non-cash volume in 2009. Both volume and value of bankcard transactions had been rising continuously since 2002. In 2008, the total volume and value of bankcard transactions, which includes transactions over bank counters and at all kinds of terminals, regardless if on us or interbank, reached CY 16.67 billion and CY 127.16 trillion respectively. In 2009, the total volume of bankcard transactions reached 19.691 billion, an increase of 18.1 percent over the previous year, for a value of CY 165.99 trillion, an increase of 30.5 percent over the previous year. Fund transfers and bill payments grew faster than cash transactions.

27. Cards acceptance is also increasing: 1.57 million merchants accepting cards payments, 2.41 million POS terminals and 215 thousand ATMs at the end of 2009. There is a steep increasing path, especially since the mid-2000s. Growth rates for merchants accepting cards were 59.9 percent and 32.6 percent respectively in 2008 and 2009. Growth rates of POS terminals were 56.2 percent and 30.5 percent respectively in 2008 and 2009. An impressive card penetration rate of over 25 percent is observed, calculated as the total value of retail card payments over the total retail sales. Growth rates of ATMs were lower with 28.4 percent and 28.3 percent respectively in 2008 and 2009. However, it needs to be noted that ATMs are still primarily used for cash withdrawals and much less for payment and transfer purposes.

28. Internal migrants in twelve major export processing provinces use payment cards for sending remittances home. The PBC has collaborated with CUP and Postal Savings banks, to provide this service. The migrant workers can deposit funds at his workplace and link a payment card that can be used to withdraw these funds at their home-town, at ATMs, merchant outlets and Postal savings bank branches. In 2007, this service was used to remit over CY 2 billion. This service is being gradually extended to other provinces, and is also being made available at other rural financial institutions.

29. The PBC is collaborating with CUP to migrate cash payments to payment cards in major rural trading hubs. In 2007, the PBC initiated a focused project for the vegetable marketplace in the Shandong province and achieved great success, moving over CY 2.7 billion cash transactions to electronic means. This project involved equipping wholesale traders with payment cards; sellers with POS terminals and directly crediting their bank accounts for sales; providing sellers with debit cards linked to their accounts and finally providing telephone banking services in the local banks allowing for wholesale traders to move funds electronically. A similar initiative on leather in Haining town reduced cash transactions in the local banks by over 20 percent.

30. Cheques are hardly used by individuals, but they constitute an important volume and value of legal persons’ payments, and to some extent interbank transactions. In 2009, 854 million cheques were issued for a value of CY 248 trillion. Credit transfers and direct debits are also quickly developing in China, reaching 847 million transactions for a value of CY 279 trillion in 2009. Other payments instruments such as banks drafts, commercial drafts, promissory notes and domestic letters of credit are used with a much lower volume/value and decreasing importance.

31. China receives the biggest inflows of remittances worldwide after India (see Figure 4). The WB estimates that US$47,553 million was sent to China in 2009, representing 1.1 percent of China’s GDP. Notwithstanding the relevance of the inflows, it is very expensive to send money to China. According to the WB Remittance Prices Worldwide database, the average total cost of sending US$200 to China from selected sending countries5 was 12.55 percent. Even though this value has decreased over the last two years, China is still among the 20 most expensive receiving countries globally. In order to reduce the cost of remittances it is suggested that Chinese authorities consider implementing the CPSS-WB General Principles for International Remittance Services and proactively embrace the Group of Eight (G-8) and Group of Twenty (G-20) Global Objective of reducing remittance costs by five percentage points in five years. It needs to be noted that the cost of remittances also depends on actions and shortfalls in the sending countries.

Figure 4.
Figure 4.

International Remittance Inflows (US$ million)

Citation: IMF Staff Country Reports 2012, 081; 10.5089/9781475502992.002.A001

Source: The WB, Migration and Remittances Team.

32. The legal and regulatory frameworks supporting payment arrangements are comprehensive in China. However, important payment system issues like protection for settlement finality and legal validation of netting are not covered at the level of the law.

33. PBC powers to oversee payment and settlement systems have a sound and clear legal basis, CSRC has overlapping oversight powers on the securities settlements. PBC oversight and regulatory powers over retail payments, interbank payments, securities settlements and related functions are recognized in the legal framework. These powers are articulated in the Article 4 of the “Peoples Bank of China law.” The securities commission also has oversight powers over securities settlements, including government securities, derived from Article 179 of the “Securities law.” A formal MoU defines general cooperation arrangements among the PBC, MOF and other authorities, such as the CSRC and the China Banking Regulatory Commission (CBRC). There is no specific MoU defining the modus operandi of these authorities over payment and settlement systems, however, there have been frequent coordinated actions and regular meetings at the technical level.

34. The PBC carries out its oversight function over all payment arrangements in the country. In addition to overseeing the systemically important payment systems in the country, the PBC has played a catalyst role in reforming interbank payment arrangements in China. Recently, PBC oversight has been extended to nonbank payment service providers. However, the PBC has not issued a comprehensive document covering the objectives, scope, instruments and institutional arrangements of its oversight function as yet.

35. The PBC has implemented a data analysis platform to assist in its oversight activities. The Payment Management Information System (PMIS) gathers payment and settlement information from various systems including HVPS and BEPS. This system provides various standard analytical reports and various ad-hoc analysis features which assist PBC in its oversight activities. PMIS also enabled the PBC to monitor the liquidity position of the participants in real-time.

36. The PBC has not yet formally established any national payments council. The central bank has legal authority to establish a self-regulated China payments and clearing association, but it has not yet established one, although it is working on a project to create the China National Payment and Clearing Association.

37. The PBC, in cooperation with other authorities and relevant stakeholders, is working on a number of projects to further improve the safety and efficiency of the CNPS. They include: the launch of a “second generation” version of the CNAPS; a reform of key aspects of the legal and regulatory framework; and initiatives to further increase the penetration of retail payment services, in particular in rural areas and through the use of innovative channels and modalities.

IV. The CPSS Core Principles

A. Assessment of the CPs and Central Bank Responsibilities

38. The HVPS is a systemically important payment system as it is the backbone of the National Payments System in China. The HVPS handled transactions for a value of 804 trillion CY in 2009, approximately 24 times the GDP value. Thus, the HVPS is being assessed below against the ten CPs for Systemically Important Systems (CPSIPS) of the CPSS and the four Responsibilities of the central banks in applying the CPSIPS. The HVPS is part of the CNAPS which comprises also the BEPS. The BEPS is not currently a systemically important payment system. However, its importance for an efficient settlement of the interbank payment system is growing. In light of these considerations, Box 1 elaborates on some of the specific features of the BEPS and the system handling of major risks. It needs to be noted that most of the features of and considerations for the BEPS are the same as presented in the HVPS assessment in Table 5 below (in particular on legal, efficiency, operational reliability, access, and governance).

Table 5.

Detailed Assessment of Observance of CPSS Core Principles for SIPS—High Value Payment System (HVPS) Part of the China National Advanced Payment System8

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39. The Cheque Clearinghouses around the country also handle an important value of transactions but the analysis of interbank data excludes that this system be considered systemically important. The gross value of cheques issued in 2009 reached a value of CY 248 trillion in 2009, about 7.4 times the GDP. However, of this amount, 350 million cheques are interbank cheques valued at about CY 62.5 trillion. This means that the majority of the cheques issued in the country are “on us” cheques issued by and presented for payment at the same commercial banks for internal settlement purpose. As noted, interbank cheques are cleared and settled through cheque image clearing system and 1,239 local clearing houses, with funds settled through BEPS and HVPS by utilizing Reserve Deposit Accounts held by financial institutions at PBC, where any high value cheque (for an amount greater than CY 500,000) must be physically presented to drawer’s bank for confirmation and payment. The PBC is encouraged to continue working on eliminating large value items from the cheque clearing process and provide incentives to use electronic means of payments. This observation is reflected in the assessment of Responsibility B. Also, ACHs handled CY 69 trillion in 2009, about twice the GDP, relatively important (though not major) for a big country like China. Thus, also the relative importance of the ACHs has been taken into consideration in the assessment of Responsibility B and C.

Bulk Electronic Payment System (BEPS)—Clearing and Settlement

The BEPS started operations in June 2005. It is an integral part of the CNAPS and is primarily used for electronic credit of eligible single transaction value (up to CY 50,000) and debit payment transactions. Payment instructions are sent in batches and cleared on a netting basis. It is primarily used to provide low-cost clearing services to large volume payment transactions. It supports all payment instruments and operates on a 7x24 basis. In 2009, the BEPS handled 226 million transactions for an amount of 11.46 trillion Yuan.

The BEPS has adopted a number of credit and liquidity risk management measures. First, only those institutions that meet certain risk profiles and specific requirements have access to the system. Second, system participants use the same HVPS settlement accounts and have access to HVPS liquidity facilities. Third, it envisages a fully collateralized net debit limit for direct participants. Fourth, participants are allowed to make real time adjustments to the net debit limit by providing earmarked funds or increasing their collateral. Fifth, multilateral offsetting mechanisms are in place within the queuing system to increase efficiency in the clearing process. Clearing procedures do not allow for unwinding in case of inability to settle by one or more participants in the system. Liquidity facilities and collateral would be rather activated in these cases.

Based on the net debit limit, the BEPS exercises control over payment orders executed by participants and automatically places in a queue, based on a chronological order, those transactions that exceed the limit. Participants may adjust the order within or remove the orders from the queue.

The BEPS settles its multilateral net balances at fixed cut-off times in the HVPS. As mentioned, the BEPS operates without interruption on a 7 x 24 basis. The operating hours of each working day are from 16:00 of the previous settlement day to 16:00 of the current settlement day. At the work day cutoff hour (16:00), the net multilateral balance of the last round of the day is submitted for settlement. When the HVPS receives the net balances, it immediately handles the settlement.

Article 11 of Administrative Methods for the Handling of Low Value Payment System Operations states: “Once the balance has been netted, the payments processed by the BEPS shall be final and irrevocable. When a financial institution of the banking industry receives the payment credit information whose balance has been offset or the payments debit information whose balance has been offset, it should debit the account of the confirmed payment recipient.”

During a legal holiday (non-working days of the HVPS), the BEPS continues to process its clearing function, but each day only one round of net balance offset is generated, which is submitted for settlement on the first available working day of the HVPS. Credit risk measures continue to apply to the clearing process even if settlement is not completed.

The BEPS pricing differentiates intra-city and intercity transactions based on different types of operations and time periods, and charges anywhere from CY 0.03 to CY 0.75 for each transaction.

Since the BEPS went online for operations, no serious settlement risk issue has ever occurred, nor has any major failure or incident impacting system operations occurred.

40. As noted, domestic FX transactions are mostly executed at the CFETC. As mentioned, while the majority of participants settle their transactions bilaterally, 21 participants use a net clearing model, and the CFETC acts as CCP. Settlement of the CY leg occurs through the HVPS and settlement of the foreign currency leg with domestic settlement banks at which participants hold FX accounts. There are quotas applied to the amount of overseas borrowing in foreign currency6 and also to the total amount of foreign currency holdings in settlement accounts.7 The mission was not provided with complete data of the transactions cleared and settled through the multilateral arrangement nor has the PBC conducted an assessment of this payment system. However, in light of the nature of these transactions and the potential systemic importance of the system, the PBC is urged to assess the compliance of this system with international standards as soon as possible.

41. As mentioned above, the FCPS was launched in April 2008 to handle the clearing and settlement of domestic foreign currency denominated transactions. The FCPS is a RTGS system and currently handles payment transactions in Hong Kong Dollar, U.S. Dollar, Euro, Canadian Dollar, Australian Dollar, Sterling Pound, Japanese Yen, and Swiss Franc (no CY transaction is accepted). The FCPS is operated and maintained by the CNCC, with Industrial and Commercial Bank of China, BOC, CCB, and Shanghai Pudong Development Bank designated as its “Proxy Settlement Banks” (PSBs). The values settled in the system do not show a systemic importance of the system (see Table 3). Nonetheless, the PBC conducted a self assessment of the system whose main conclusions are reported in Appendix I.

42. The assessment of systemically important payment systems is conducted over existing payment systems/arrangements, although relevant projects and reforms are taken into account. Each CP and Central Bank Responsibility was assessed on a qualitative basis based on a five-fold assessment categorization: observed, broadly observed, partly observed, non-observed, and not applicable. A CP is considered observed whenever all assessment criteria are generally met without any significant deficiencies. A CP is considered broadly observed whenever only minor shortcomings are found, which do not raise major concerns and when corrective actions to achieve full observance with the CP are scheduled and realistically achievable within a prescribed period of time. A CP is considered partly observed whenever the shortcomings are sufficient to raise doubts about the ability to achieve observance within a reasonable time frame. A CP is considered non-observed whenever major shortcomings are found in adhering with the assessment criteria. Whenever a system is assessed to be broadly, partly or non-observed with a CP, recommendations are proposed for achieving full observance. A CP is considered not applicable whenever it does not apply given the structural, legal and institutional conditions. The detailed assessment and recommended actions are presented in tables 5-8 below.

Table 6.

Central Bank Responsibilities in Applying the CPs

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CPSS – Principles for Co-operative Oversight of Payment and Settlement Systems

In May 2005, the Committee on Payment and Settlement Systems (CPSS), at the BIS published the “Central bank oversight of payments and settlement systems” report. This report identifies ten principles to guide central banks in their oversight activities, five of these principles specifically pertain to co-operative oversight. The five principles for co-operative oversight are relevant for oversight of payment and settlement system activities of transnational and multi-national payment system operators. The five principles for co-operative oversight identified in this report are listed below.

1. Cooperative Oversight Principle 1. Notification

Each central bank that has identified the actual or proposed operation of a cross-border or multi-currency payment or settlement system should inform other central banks that may have an interest in the prudent design and management of the system.

2. Cooperative Oversight Principle 2. Primary responsibility

Cross-border and multicurrency payment and settlement systems should be subject to oversight by a central bank which accepts primary responsibility for such oversight, and there should be a presumption that the central bank where the system is located will have this primary responsibility.

3. Cooperative Oversight Principle 3. Assessment of the System as a Whole

In its oversight of a system, the authority with primary responsibility should periodically assess the design and operation of the system as a whole. In doing so it should consult with other relevant authorities.

4. Cooperative Oversight Principle 4. Settlement Arrangements

The determination of the adequacy of a system’s settlement and failure-to-settle procedures in a currency should be the joint responsibility of the central bank of issue and the authority with primary responsibility for oversight of the system.

5. Cooperative Oversight Principle 5. Unsound Systems

In the absence of confidence in the soundness of the design or management of any cross-border or multicurrency payment or settlement system, a central bank should, if necessary, discourage use of the system or the provision of services to the system, for example by identifying these activities as unsafe and unsound practices.

Table 7.

Summary observance of CPSS Core Principles and Central Bank Responsibilities China HVPS and Central Bank Responsibilities

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Table 8.

Recommended Actions to Improve Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPs China HVPS

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V. Authorities’ Response

The Chinese authorities welcome and support the CPSS assessment as an opportunity for reflection and improvement for China payment and settlement system according to international standards. The assessment team has undertaken an excellent task, demonstrating high quality, professionalism, dedication and the ability to cut through complex issues in a constrained timeframe. The authorities appreciate the opportunity to provide the following comments.

Over the past decade, China has continuously pushed forward the development of China payment and settlement system, which constitute the backbone of China’s financial system. We have built a payment network consisting of the central bank inter-bank payment systems, the banking institutions’ internal payment system, the security settlement system, the FX settlement system, the bankcards payment system and other retail payment systems run by private sectors. Non-cash payment instruments have been widely used and met various payment requirements. Commercial drafts have been underwritten and transferred in an electronic way. Bankcards penetration ratio has been on a fast track and bankcards have been the most widely used payment instrument by Chinese residents. Online payment, mobile payment and telephone payment have been developing dramatically. The application of non-cash payment instruments has greatly facilitated economic production and civil life, reduced cash circulation and transaction costs. Payment providers have been diversified. These include the central bank, banking institutions, nonbanking institutions and securities settlement institutions as payment organizations. The payment services have been market-driven. Modern payment means have also found their way in rural areas. The pilot cross-border trade settlement in RMB has developed in an orderly way. The management system of bank settlement accounts has improved on a gradual basis. The PBC has promulgated regulations on bank settlement accounts and established the bank settlement account management system to implement regulations. At the same time, the PBC launched a nationwide identity authentication system of accounts with the Police Bureau to implement the “know your customer” scheme. The payment system oversight has been strengthened, with safety and efficiency as the priority. The PBC has also improved supervision techniques and realized the DVP mode in the bond market.

The Large Value Payment System (LVPS) run by the PBC has been designated as the systemically important payment system and has been assessed against the CPs. The assessment concluded that the system observes (observed or broadly observed) all the CPs except CPI (legal basis). The PBC pays high attentions to the assessment results and appreciates valuable recommendations of the IMF and the WB. In implementing the recommendations, the PBC has realized one point entry in CNAPS1, e.g., the treasury centralized booking system and China postal savings bank’s internal payment system have been connected to CNAPS1 from one point and settled their transactions with one account.

Measures will be taken to strengthen our legal foundation, management and supervision of China payment systems, so as to improve its practicality and efficiency in the future.

1. CP I legal Foundation. The PBC has been aware of the shortcomings in the legal framework, and has decided to draft a payment system act to avoid the effects of the “zero hour rule” and give the legal recognition of netting arrangements and settlement finality. But the process of establishing legislation will take time and may involve many authorities.

2. CP VIII Practicality and Efficiency. The PBC is launching the 2nd generation of CNAPS to increase efficiency and practicality. CNAPS2 will be designed to extend the opening hours of settlement to meet the needs of users in different areas and various financial markets.

3. CP X Governance. The PBC has decided to improve management, upgrade the payment system and conduct a regular drill of emergency procedures, with an aim to achieving full observance of the CPs.

Central Bank Responsibilities A, B, C and D. The PBC fully agrees with the recommendations and will take proper measures to ensure full observances of all CPs. The PBC will clarify in detail its policy stance in the payment system oversight in a publicly available document, and extend its oversight over all payments and securities settlement systems, including the systemically important systems and retail payment systems. The PBC will assess the safety and efficiency of the CFETS and the ACHs with relevant international standards. Besides, the PBC is about to establish the China National Payment Association and strengthen cooperation with relevant authorities, foreign central banks and international organizations.

Appendix I: Self-Assessment of China Domestic Foreign Currency Payment System (FCPS)

The PBC conducted a self assessment of the FCPS, which was provided to the FSAP team. The main features are summarized below.

• Legal and Regulatory Framework

The general legal framework applicable to the FCPS is described in the HVPS assessment. Rules and procedures for the FCPS include, among other things: Administrative Procedures for Domestic Foreign Currency Payment System, Procedures for the Administration of Settlement agents in Domestic Foreign Currency Payment System, Operation Procedures for Domestic Foreign Currency Payment System, Operational Procedures for Domestic Foreign Currency Payment System, Contingency Plan for Domestic Foreign Currency Payment System, and Circular of The PBC concerning Matters to Transaction Processing in Domestic Foreign Currency Payment System (PBC Doc [2008]-387).

• Management of Financial Risks

Credit Risk. Article 10 of the Administrative Procedures for the FCPS stipulates that the system “processes payment instructions individually in real-time and settles each payment to its full value. Any payment sent by a participant or specially authorized participant shall become final upon settlement.” Article 51 stipulates that the system “shall calculate available quotas by currency for all participants in real time as a way to safeguard against credit risk.” Liquidity Risk. Article 53 of the Administrative Procedures states that “Participants shall maintain sufficient available quotas at Foreign Currency Clearing Processing Center (FCCPC) to ensure that foreign currency payments are timely cleared.” Article 54 stipulates that “Upon being informed by FCCPC that their payments have been placed in a queue for settlement, specially authorized participants shall timely notify and urge relevant participants to raise funds. In the event that any relevant participant fails to raise sufficient funds before the Settlement Window is closed, specially authorized participants shall ensure foreign currency payments are timely settled in the system by accessing risk deposit and risk-sharing mechanism.” Article 55 stipulates that “Settlement agents shall provide participants with liquidity support such as overdraft facilities and pledge financing as a way to safeguard against liquidity risk.”

• Settlement

As a RTGS system, the FCPS settles payment instructions denominated in each of the currencies in real time upon receipt of such payment instructions from any participant provided that such participant has sufficient available quotas.

• Settlement Asset

Commercial bank currency is used by the FCPS for settlement, which means that participants uses the foreign currency inter-bank deposit they maintain with settlement agents to complete settlement. Currently, major settlement agents designated by the FCPS are: Industrial and Commercial Bank of China (Euro & Japanese Yen), BOC (U.S. Dollar), CCB (Hong Kong Dollar), Shanghai Pudong Development Bank (Pound Sterling, Australia Dollar, Canadian Dollar & Swiss Franc).

While the FCPS uses commercial bank money as its settlement asset, it employs mechanisms for settlement agent selection, system oversight and governance, settlement assets conversion and other areas, which address the credit and liquidity risk of the settlement assets. They include: First, the Administrative Procedures for settlement agents in Domestic Foreign Currency Payment System calls for the settlement agents to be financially robust and carry no or little liquidity risk. For example, Article 13 stipulates that “a bank may apply for status of a settlement agents for a certain foreign currency when: (1) It is a corporate domestically registered for more than 10 years; (II) It has all licenses necessary for a FX service provider and has appropriate capacity for providing FX services; (III) It is operationally and financially healthy with strong ability to raise funds in foreign currencies; (IV) It owns an appropriate number of domestic branches and an appropriate number of overseas branches or a complete international network of correspondent banks; (V) It has an appropriate number of managers and operators that are familiar with foreign currency payment services and foreign currency payment system; (VI) It has safe and efficient internal operational systems; and (VII) It has a sound governance program for controlling its foreign currency settlement services.” Second, the portfolio of settlement agents should be capable of ensuring that settlement assets be liquid and maintained at a high credit rating level. Third, the PBC monitors and keeps track of the liquidity and credit rating levels of the settlement agents.

• Operational Reliability and Business Continuity

The FCPS meets the security policies and operational service levels agreed by the system operator and participants. In particular, a portfolio of business procedures and technical safeguards have been implemented to ensure security and reliability with a 99.9 percent of system operational reliability and a recovery time objective of 120 minutes.

Security: Security policies for the FCPS conform to the security standards centrally set for China’s banking industry. The system is mandated to attach digital signatures to payment transaction information and establish a process for verifying digital signatures. So, the system is capable of ensuring integrity, authentication and non-reputability of payment instructions. Primary backbone communications lines are protected by IP encryption to ensure confidentiality of data throughout the transmission over backbone networks. The PBC periodically conducts security tests and assessments of FCPS.

Operational reliability: The FCPS has been built with full account given to computer and network redundancy by installing hot backup systems at FCCPC, shared member bank front ends (MBFEs) and settlement banks to avoid single-point failures; regarding network communications, backup communications lines are also deployed. In preparation for infrastructure failures and natural disasters, The PBC has built offsite backup centers for the FCCPC and shared MBFEs for switching production to backup centers in the event of emergencies.

Performance tests show that the FCCPC is capable of processing 70,000 payments per hour, meeting operational requirements and being sufficient for supporting actual workloads. Business continuity: In late August 2009, the NPC successfully implemented emergency drills of the payment settlement system (including domestic foreign currency payment system). The system switched over to the emergency center and operated for a week under emergency scenarios, thus demonstrating the validity of the business continuity plan. Real time backup technology for business data is used between the disaster backup center of the FCCPC and the shared front end processors and the operating center. There is a one minute lag time between the business data of the disaster backup center and the business data of the operating center. The distance between the backup center and the main station is greater than 500 km and it uses communications and power lines that are different from those of the operating center.

• Pricing

Currently, the FCCPC uses the method of cost covering pricing and the settlement agents use the method of market pricing. Based on the existing pricing, when participants process each transaction, the maximum cost they pay to the FCCPC and settlement agents is 16 Yuan to 26 Yuan, depending on the currency, whereas before the FCPS was launched, the cost for a bank that used a correspondent bank as the agent bank for foreign currency settlement in China was about 35 Yuan to 140 Yuan. Therefore, the construction of the FCPS has lowered the cost of banking institutions in processing foreign currency payments and increased the competitiveness of banking institutions.

• Access Criteria

Article 18 of Administrative Procedures for the FCPS stipulates that: “A bank that joins the foreign currency payment system as a direct participant should meet the following conditions: (One) Have qualifications as a financial entity in China; (Two) Have qualifications as approved by the banking supervision and management authority of the SCl for processing the relevant foreign currency business; (Three) Have an appropriate number of management and operations personnel familiar with the foreign currency payment business and foreign currency payment system; (Four) Meet the applicable technical and security requirements for joining the foreign currency payment system; (Five) Have a sound internal management system related to the foreign currency payment system; (Six) Have an effective and feasible plan for preventing and eliminating foreign currency payment risks.”

Article 19 stipulates that “A foreign currency settlement institution that joins the foreign currency payment system as a specially designated participant should meet the following conditions: (One) Have qualifications as approved by competent state authorities to process foreign currency settlements; (Two) Meet the applicable technical and security requirements for joining the foreign currency payment system; (Three) Have a sound internal management system related to the foreign currency payment system; (Four) All of its members are participants in the foreign currency payment system or may authorize participants in the foreign currency payment system to perform settlements; (Five) Have a sound risk bond system and have signed a risk sharing agreement with all members; and (Six) Have an effective and feasible plan for preventing and eliminating foreign currency payment risks.”

• Exit Criteria

Article 68 of Administrative Procedures for the FCPS stipulates that “In the event that a participant engages in any of the actions below, the PBC may, depending on the circumstances and impact, publicly circulate information thereon, suspend its foreign currency payment system business and order it to withdraw from the foreign currency payment system. (One) Provides false application materials and join the foreign currency payment system by deceptive means; (Two) Processes transactions through the foreign currency payment system that do not comply with state policies and regulations related to foreign currency control; (Three) Fails to verify and reply or fails to verify and reply in a timely manner after receipt of an inquiry; (Four) Fails to process a foreign currency refund after receipt of an application for a foreign currency refund in accordance with the applicable provisions; (Five) The available limit is insufficient, causing the foreign currency payment system to repeatedly open the settlement window; (Six) Has major a risk hazard that affects the secure and stable operations of the foreign currency payment system; and (Seven) After the occurrence of a foreign currency payment system failure or unexpected incident, fails to report same according to the applicable provisions or fails to actively take effective measures, thus affecting the secure and stable operations of the foreign currency payment system.”

Article 69 stipulates that “In the event that a specially designated participant engages in any of the actions below, the PBC may, depending on the circumstance and impact, publicly circulate information thereon, suspend its foreign currency payment system business and order it to withdraw from the foreign currency payment system: (One) Provides false application materials and join the foreign currency payment system by deceptive means; (Two) Processes transactions through the foreign currency payment system that do not comply with state policies and regulations related to foreign currency control; (Three) Fails to perform risk control over the net offset balance business launched thereby, causing the foreign currency payment system not to be able to settle normally at the end of the day; (Four) Has major a risk hazard that affects the secure and stable operations of the foreign currency payment system; and (Five) After the occurrence of a foreign currency payment system failure or unexpected incident, fails to report same according to the applicable provisions or fails to actively take effective measures, thus affecting the secure and stable operations of the foreign currency payment system.”

Article 71 stipulates that “Participants and specially designated participants that have been ordered by the PBC to withdraw from the foreign currency payment system shall not apply for joining the foreign currency payment system for a period of 2 years from the date of withdrawal. A bank whose qualifications as settlement agents for a certain currency have been terminated early by the PBC shall not apply for becoming a settlement agent for such a currency for a period of 2 years from the date of termination of such qualifications.”

Article 72 stipulates that “In the event that participants, specially designated participants, settlement agents and the FCCPC fail to process foreign currency payment business in accordance with the applicable provisions, thus causing any fund loss, they shall undertake the liability for damages in accordance with law; should such failure constitute a crime, criminal liability shall be pursued in accordance with law.”

Voluntary withdrawal from the system: Article 30 of Administrative Procedures for the FCPS stipulates that: “In the event that a participant and specially designated participant needs to withdraw from the foreign currency payment system, it shall submit a written application to the PBC in accordance with provisions of Article 20 of these methods, where the participant should revoke all of the information related to its sending or receiving bank number in advance through the foreign currency payment system. For a participant and specially designated participant that meet the conditions for withdrawal, the head office of PBC shall determine the effective date of its withdrawal from the foreign currency payment system and shall make same public through the foreign currency payment system.”

• Governance Arrangements

Major decisions affecting the FCPS are all made after the opinions of the relevant parties are sought and after careful consideration. For example, during the designs and construction of the system, the PBC sought the opinions of policy banks, state owned commercial banks and nationwide commercial banks on major issues, such as whether to set up the systems, the ownership structure, system framework and business scope, etc. Some of the more relevant governance arrangements are as follows:

  • (1) The core system of the FCPS includes the FCCPC and settlement agents, where the FCCPC is operated by the PBC NPC. As a public institution under the aegis of the PBC, the NPC is a non-profit organization.

  • (2) The NPC and the settlement agents have, in strict compliance with the applicable regulations and provisions of the FCPS, provided professional knowledge training for the relevant management personnel, business supervisors, technical support personnel and operations personnel, etc., of FCPS. They have the skills necessary for achieving the goal of the system and can take responsibilities for system operations.

  • (3) Ownership information of the FCPS is publicly available. Information on management structure is issued in the form of official documents to settlement agents and all participants. The appointment procedures of senior management personnel are publicly available.

  • (4) The Crisis Response Plan for the FCPS provides a detailed explanation of decision and notification procedures and timetables for handling abnormal situations.

No formal users’ group is established for participants to provide regular feedback on systems’ operation. Participants are also not fully aware so far of the details of the “second generation” project. However, the PBC organizes meetings and workshops on a regular basis with payment system stakeholders.
1

Massimo Cirasino is Head of the Payment Systems Development Group of the Financial and Private Sector Development Vice Presidency (FPD) at the World Bank. Mario Guadamillas is the FSAP Manager in FPD at the World Bank.

2

The China Payment System Development Reports, 2007, 2008, and 2009, prepared by the PBOC Payment and Settlement Department were particularly relevant.

3

Bank of China (BoC), Industrial Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of Beijing (BOB), China Development Bank (CDB), Bank of Communication, Shanghai Pudong Development Bank, Standard Chartered Bank, HSBC, Bank of East Asia (BOEA), JP Morgan-Chase, and Shandong United Rural Cooperative.

4

Products in the OTC market include forward CY/FX and FX swap. Enterprises and nonbanking financial institutions, in line with their needs, can participate in the CY/FX derivative transactions in the OTC market to hedge risks. Banks can participate in the CY/FX derivative transactions in the interbank FX market. Enterprises, according to their needs, can conduct CY/FX derivative transactions via banks.

5

France, Germany, Italy, Japan, Singapore, Spain, United Kingdom, and United States of America. Cost includes the transaction fee and exchange rate margin. Average is un-weighted and does not reflect the market shares of the different firms that compose the average.

6

According to the Administrative Rules for the Pilot Program of CY Settlement of Cross-Border Trade Transactions, a domestic agent bank may provide financing for the inter-bank CY fund transfer account opened by an overseas participating bank, and also settlement banks in Hong Kong and Macau can borrow and lend CY in the interbank market for clearing and settlement purposes.

7

SAFE applies quotas on banks’ FX positions for operations on clients’ behalf, for its own, or for participating in the interbank FX market. These quotas are jointly determined for positions in the OTC market, positions by market-makers, and positions on individual currencies.

8

In addition to the HVPS, the CNAPS also comprises the Bulk Electronic Payment System (BEPS). The BEPS is an important payment application but was not qualified as a SIPS.

9

The laws and regulations in China are classified, by virtue of their legal status and effect, as Legislations, Administrative Regulations, Ministerial Rules and Normative Documents. Legislations refer to governing documents, which are preceded only by the Constitution and promulgated by the legislative body, namely the National People’s Congress and its Standing Committee. Administrative Regulations, preceded by Legislation, refer to regulatory documents promulgated by SC, the top executive body to implement Constitution and Legislations to govern administrative matters of the State. Ministerial Rules refer to orders, directives, rules and other normative documents, which are preceded by Administrative Regulation and promulgated by various ministries of the SC.

10

The operational reliability and business continuity of the HVPS coincides with those of the CNAPS and are, therefore, the same for the BEPS, as well.

11

Polling, or polled operation, in computer science, refers to actively sampling the status of an external device by a client program as a synchronous activity.

12

First, in terms of operational capacity, the peak volume of the HVPS is about 460,000 transactions / hr. The intercity peak volume of the low value payment system is about 9.6 million transactions / hr. In terms of the operational handling time, the time for handling a transaction through the HVPS is less than 60 seconds at its fastest. There are two types of business handled for the low value payment system; batch and real time. The time for handling batch business in the same province is less than 30 seconds; for cross province batch business, less than 60 seconds. The real time in the same province is processed in less than10 seconds; for cross province, in less than 20 seconds. In terms of system response time, the log on time to the high value and low value payment system is 3 seconds at a maximum; from entry of a message or file into the system to receipt return or system response, the time does not exceed 5 seconds. Finally, in terms of system reliability, the availability of both the high value and low value payment systems cannot be less than 99.9 percent of the total operating hours at a minimum; the average time for restoration does not exceed 20 minutes.

13

For participants with a low operating volume (such as rural credit cooperatives), several choices for low cost access methods are available. First is the centralized small front end processor method. This method allow rural credit cooperatives to operate as direct participants through a small front end processor system, that directly connects to the payment system front end processor, with various rural credit cooperatives within the province as indirect participants, where the small front end processor client end sends and receives payment transactions. The small front end processor system is an internal network system designed for rural credit cooperatives that have not set up a province wide comprehensive business system or acceptance system. Second is a shared front end processor method. This method refers to connection of the front end processor with the payment system, with multiple financial institutions connected to the shared front end processors, and operations are entered through the shared front end processors. The third choice is the payment settlement correspondent model. A financial institution may choose the local branch and sub-branch agency of a financial institution of the banking industry or a local branch or sub-branch of the PBOC as a correspondent bank to handle payment settlement business.

14

SSS will be assessed in detail in the context of the CPSS-IOSCO assessment during the second FSAP mission.

15

However, the PBOC has invited the CSRC and other organizations to conduct joint reviews on securities clearing and settlement and in particular on the settlement of the cash-leg of securities transactions.

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Cover IMF Staff Country Reports
People’s Republic of China: Detailed Assessment Report: CPSS Core Principles for Systemically Important Payment Systems
Author:
International Monetary Fund
Volume/Issue:
Volume 2012: Issue 081
Publisher:
International Monetary Fund
ISBN:
9781475502992
ISSN:
1934-7685
Pages:
57
DOI:
https://doi.org/10.5089/9781475502992.002
Figure 1.

China National payments System
Figure 2.

Percentage Growth of Value and Volumes in Selected Large Value Transfer Systems from 2007 to 2008
Figure 3.

China Foreign Exchange Trade System
Figure 4.

International Remittance Inflows (US$ million)