China’s desire to escape the shadow of the U.S. dollar and build an alternative infrastructure for global finance is being stymied by one major factor: Its reluctance to loosen the shackles around its own currency.

By creating the Cross-Border Interbank Payment System, or CIPS, back in 2015, the Chinese financial authorities had hoped to provide a way for companies and individuals to keep money flowing internationally — even if China were ever to come under the same kind of economic pressure Western countries are currently meting out to Russia, following its invasion of Ukraine.

The problem is that CIPS has neither the scope nor the technical capability to match its Western counterpart — the Society for Worldwide Interbank Financial Telecommunication (SWIFT), often described as the Gmail of the global banking system.

In late February, the U.S. and EU took the drastic step of cutting Russian banks off from SWIFT, making it much harder for Russian banks to participate in global trade. If China were ever to face such measures — for example, following a future invasion of Taiwan — it could in theory resort to CIPS as an alternative, using the renminbi for international payments. 

That, though, is where the plan hits a snag. China’s strict capital controls — which limit currency exchange flows in and out of the country — have made it hard for the renminbi to become a widely used international currency, despite the country becoming the world’s second-largest economy. Only 3.2 percent of SWIFT transactions in January were made with the renminbi, for example. And though that made it the fourth most actively-used currency for global payments by value that month, it’s still far behind the U.S. dollar and the euro. 

So although the CIPS tagline declares that “Wherever there is renminbi, there is CIPS service,” the truth is that the renminbi just isn’t used in enough places yet.

“CIPS fits into that genre of initiatives to internationalize the renminbi,” says Zennon Kapron, the director of Kapronasia, a financial technology research and consulting firm. “But the fundamental question here is who wants to hold renminbi and who wants to trade it?”

Despite the backing of the People’s Bank of China, and its express goal of “facilitating the global use of the renminbi,” CIPS still only has 76 direct partners — predominantly Chinese banks — and more than 1,000 indirect partners that still need to go through a direct partner to process transactions. 

Usage of CIPS pales by comparison with SWIFT, which has become an integral part of the global financial system since it was founded in 1973 in Belgium. While SWIFT processed an average of 42 million transactions per day in 2021, for example, CIPS only processed around 13,000 transactions. Neither CIPS nor SWIFT responded to The Wire’s requests for comment. 

SWIFT is dominant partly because of its messaging system, which assigns a code to each specific financial institution, allowing parties to send messages between institutions securely and quickly. Without SWIFT, banks can still communicate, but far less efficiently. CIPS itself heavily relies on SWIFT for its messaging capability, something that would need to change for CIPS to become a meaningful rival.

“If China starts to develop a real messaging system that will be a pretty clear signal that China wants to beef up a viable alternative,” says Emily Jin, a researcher at the Center for a New American Security.

China’s move to build CIPS tracks with Beijing’s broader push to achieve self-reliance across all sectors of the country’s economy, including semiconductors and food supplies. The challenges facing the system, due mainly to the slow progress of renminbi internationalization, are in turn a reminder of the roadblocks ahead as China attempts to achieve greater economic independence. 

“You cannot have it both ways: capital controls and full internationalization of the currency,” says Chen Zhiwu, finance professor and director of the Asia Global Institute at the University of Hong Kong, adding that the world’s most internationalized currencies are all based in countries where foreigners are willing and easily able to invest. 

China’s unwillingness to allow the renminbi to flow more freely has also stifled hopes that its flagship Belt and Road Initiative would draw more developing countries into the currency’s orbit. Similarly, China’s new digital currency is aimed in part at facilitating international renminbi payments. But, as Chen says, “[a] digital currency would make things more convenient to make cross-border payments, but it does not change the fundamentals.“ 

Speculation has grown in recent weeks that China’s implicit support for Russia’s invasion of the Ukraine could boost usage of CIPS, with the two countries effectively forming a closed monetary loop to help Russia get around SWIFT-related sanctions. After Mastercard and Visa cut off operations in China, Russian banks are reportedly considering using UnionPay, the state-owned Chinese system, to issue cards. 

In the short term, forming such a closed loop using CIPS is impractical because of its reliance on SWIFT for crucial functions, says François Chimits, an analyst at MERICS. Such a move is also unlikely because it would mean China allowing its economy to become more integrated with that of Russia, at the expense of its ties to advanced Western economies, says Chimits. 

“The extra value for a Chinese economy that is dead set on breaking the middle-income trap by focusing on technology development appears limited at best,” he says. 

Josh Lipsky, the director of the Atlantic Council’s GeoEconomics Center, says the looming threat of secondary sanctions will also limit China’s financial cooperation with Russia. ICBC and Bank of China have already restricted financing for Russian commodities, according to Bloomberg reporting. 

“China is not interested in helping Russia evade sanctions with CIPS. There is no interest and there is no capability,” Lipsky says. 

Russia-China trade is still heavily reliant on the U.S. dollar, despite a mutual push between the two countries to reduce their dependence. In 2020, 60 percent of Chinese exports to Russia used the greenback. Russia does have its own version of SWIFT, too — the System for Transfer of Financial Messages, which it created after Western sanctions in response to its 2014 Crimea invasion — but it is even smaller than CIPS.

So while the severity and speed of the Western world’s sanctions on Russia may be a wake-up call for China, it would take a serious reconsideration of its economic policy for CIPS to grow in prominence. 

“This will force a rethinking of global payments, but you can’t just snap your fingers. The renminbi itself is not internationalized. That is why it [the SWIFT-CIPS comparison] is not one-to-one,” says Paul Triolo, senior vice president for China at Albright Stonebridge Group, a consulting firm. “This is coming at a time when CIPS is not mature.”

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