Payments Proliferation

Economic redevelopment has been under way in the People's Republic of China since 1978, but the nation's payment systems only recently began to be modernized. Payment clearing has traditionally been fragmented and regionalized throughout this vast country, relying principally on cash, checks, drafts, and branch transfers. The central bank, the People's Bank of China (PBOC), estimates that in 2005, some 1.8 billion checks totaling 350 trillion yuan were processed in China.

Recent payment system developments

Growth in trade and commerce in China has created the need for national payment products and infrastructures. To address this need, the Chinese government first turned its efforts to developing electronic payment systems to support domestic and international commerce, implementing the Chinese National Advanced Payment System (CNAPS) in 2002. Figure 1 summarizes the new national payment systems.

Figure 1
National Electronic Payment Systems in the People's Republic of China (2007)
Source: TowerGroup

High Value Payment System
China's High Value Payment System (HVPS) is a real-time gross settlement system (RTGS) for settling interbank, domestic renminbi transactions. Not surprisingly, the system's capabilities and functionality are similar to those of the high-value payment networks of the advisory countries involved with its development, such as the Clearing House Automated Payments System (CHAPS) in the United Kingdom, Fedwire in the United States and BOJ-NET from the Bank of Japan. Real-time payment and liquidity data is provided across the vast geographic expanse of China through modern high-speed fiber-optic telecommunications. Operating hours are 8 a.m. to 5 p.m., with an additional hour until 6 p.m. available to resolve payments held due to lack of funds.

HVPS can be accessed directly or indirectly via participating banks. In this regard, the connectivity model is similar to the direct and indirect participation structure employed by Canada's Large Value Transfer System (LVTS). Foreign banks with renminbi payment capabilities may also connect to HVPS.

Bulk Entry Payment System
The Bulk Entry Payment System (BEPS), which was completed in June 2005, benefits from the same telecommunications infrastructure as HVPS. This ACH-like system is for lower-value payments in renminbi. Unlike with the real-time operation of HVPS, netting is daily on BEPS, with settlement occurring overnight on a batch-processing basis. BEPS permits transaction types similar to those of traditional ACH bulk clearing systems:

Credit transfers
Preauthorized collections (similar to direct debits)
Dated debits (a debit instruction with a fixed future execution date)

Operating hours of BEPS are 8 a.m. to 5 p.m., with payment declared final once the sending and receiving banks have processed both credit and debit transactions. Typically, settlement is next day following the transaction (T+1). TowerGroup anticipates that corporations across China will gradually move transactions from local city checks to the BEPS system.

National Check Image Exchange System
Until 2007, paper check clearing in China was local, limited to particular cities and used primarily by corporations. The National Check Image Exchange System (CIS) is China's new, image-enabled check clearing system. Like the original CNAPS infrastructure, CIS was built on a high-speed fiber-optic network.

Following a six-month pilot program in six cities and provinces in late 2006, the national system was declared live in June 2007. Checks may now be truncated at the bank of deposit, where the paper item is converted to an image, which is then exchanged electronically with the drawer's bank. Upon receipt of the image, the drawer's bank must confirm delivery with an electronic acknowledgment before final settlement can occur. Interbank settlement of check transactions is effected through the national electronic payment networks developed under CNAPS.

Despite a geographic distance of over 3,200 miles (5,200 km) from east to west, China is rare among large countries because it resides entirely within a single time zone. However, this feature simplifies payment settlement and liquidity management since the same cutoff time applies to payment processing in every province.

Funds transfer between Hong Kong and China

Referencing China, it is important to distinguish between the PRC and Hong Kong, the former British colony that is now a Special Administrative Region (SAR) of China. The Chinese government employs a "one country, two systems" policy, which permits Hong Kong to retain a separate currency (the Hong Kong dollar) and separate payment systems. Figure 2 compares the main features of the payment systems in the PRC and Hong Kong.

Figure 2
Payment Systems: People's Republic of China vs. Hong Kong (2007)
Source: TowerGroup

Although Hong Kong maintains a separate clearing system for its currency, the commercial ties between the PRC and the Hong Kong SAR have fostered cooperation between their economic and banking authorities. The renminbi is not legal tender in the SAR, but larger banks in Hong Kong now offer accounts denominated in renminbi to facilitate commerce and travel between Hong Kong and its neighboring PRC province, Guangdong. Furthermore, the Hong Kong Monetary Authority (HKMA) developed bilateral payment services to clear Hong Kong and U.S. dollar checks and similarly denominated RTGS payments from Hong Kong to Guangdong province and the gateway city of Shenzhen.

With the completion of modern clearing and settlement systems in 2007, China possesses national payment capabilities worthy of an economic powerhouse. TowerGroup expects that the access to national clearing and the enhanced funds transfer capabilities with Hong Kong will facilitate intraregional trade for domestic Chinese and foreign companies alike. AFP corporate practitioners who wish to understand how they can use the new Chinese payment systems should contact their regional cash management bank for Asia.

This article is based on research by the Global Payments service at TowerGroup, a leading research and advisory services firm focused exclusively on the global financial services industry. Senior Analyst Colin Kerr can be reached at ckerr@towergroup.com. Those interested in learning more about TowerGroup or subscribing to its research services may call +1.781.292.5200 or e-mail service-info@towergroup.com.