China’s markets re-opened after the extended national holiday today.  Policymakers hit the ground running with two new initiatives.  The initiatives are likely driven by China’s own reform efforts, but they will also enhance the likelihood that the yuan is included in the SDR. 

The first initiative is the launch of its own payment system for cross-border yuan transactions.  It is aptly called China International Payment System (CIPS), and it will provide yuan clearing and settlement services.  An estimated 19 banks are participating initially as direct participants, including affiliates of at least three non-Chinese banks. Another 38 Chinese banks and nearly 140 foreign financial institutions have been approved as “indirect participants’, meaning they have access to CIPS services through a direct participant.

CIPS will operate from 9 am to 8 pm in Beijing.  This suggests it is aimed at primarily the regional market. There are of course other payment systems. According to Bloomberg, the real-time yuan settlement platform in Hong Kong (active from 8:30 am to 5:00 am the next day), processed CNY21.8 trillion (~$3.4 trillion) of transactions in August. This was a record.

It is possible that the launching of CIPS causes greater fragmentation in that space, but over time, it could also take market share.   Reports suggest it may reduce costs and processing times compared with alternatives.  CIPS is consistent with China’s efforts to bolster the yuan’s profile and to enhance its ability to meet the IMF’s vague criteria of “freely usable”. 

The second initiative is more subtle.  China took another step toward adopting the IMF’s best practices.  The idea is that if China is to have the status of being a member of the SDR, it ought to show that it is a “good citizen” by adopting meeting the highest standards or IMF practices.  As an example, recall that recently China has begun reporting the composition of its currency reserves.