Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Is Building a Parallel Cross-Border Payment System
Transcript
- Lucas: Luna, we talk a lot about China's exports, its property crisis, its tech sector. But there's this slower-burn story happening underneath all of that that I think is actually more consequential in the long run — China building a parallel financial plumbing system that can operate outside the dollar-based SWIFT network. Luna: The Cross-Border Interbank Payment System, CIPS. We've mentioned it in passing before, but you're right — it's quietly growing. Lucas: Quietly is the word. CIPS was launched back in 2015, but for years it was mostly symbolic. Now, as of mid-2026, it has over 1,400 direct and indirect participants across 109 countries. That's up from about 1,000 participants in 2023. And the volume of transactions cleared through CIPS hit a record 123 trillion yuan in 2025, which is about 17 trillion dollars at the current exchange rate. Luna: And that's happening while the yuan itself is hovering around 6.78 to the dollar — which is actually fairly stable compared to the volatility we've seen in other emerging market currencies. Lucas: Right. The yuan is not in freefall; it's being managed carefully. And that stability matters if you want other countries to actually use it for trade settlement. The data point I keep coming back to: yuan-denominated trade now accounts for roughly 24 percent of China's total cross-border transactions. Two years ago it was 16 percent. That's a structural shift. Luna: So who's actually using CIPS? Is it just Chinese state-owned banks and a few friendly nations, or is it broader than that? Lucas: It's broader than most people think. The big movers recently have been energy exporters. Saudi Arabia signed an agreement in late 2023 to settle oil sales in yuan, and they've been ramping up usage. Russia, obviously — after the 2022 sanctions, they had no choice. But also Brazil, Argentina, even some European banks are joining as indirect participants because they want a backup option. Luna: It's that hedge against 'dollar weaponization' — the fear that the US could cut you off from SWIFT like it did with Russia. That's a powerful motivator. Lucas: Exactly. And China is smart about this — they're not trying to replace the dollar overnight. They're just building an alternative lane. The digital yuan, or e cny, is part of that too. It's already being used in cross-border pilot programs with Hong Kong, Thailand, and the UAE. The idea is that if you can settle a trade instantly with a central bank digital currency, you bypass the correspondent banking system entirely. Luna: But doesn't that run into capital control issues? China still has strict controls on moving money in and out of the country. Lucas: It does, and that's the tension. The People's Bank of China wants yuan internationalization, but they don't want capital flight. So the digital yuan is designed to be programmable — you can attach conditions to when and where it can be used. That makes it less attractive as a pure store of value, but very useful for trade finance. Luna: So the use case is narrow but real. If you're a Brazilian soybean exporter selling to China, you can get paid in digital yuan and immediately use it to buy Chinese machinery, all within a controlled ecosystem. Lucas: Right. And that's exactly what we're seeing. China is now Brazil's largest trading partner, and about 15 percent of that bilateral trade is settled in yuan, up from practically zero a few years ago. The same pattern with Russia — yuan settlements surged after the Ukraine invasion. Luna: Now, does the US Treasury or the Fed actually care about this? Because the dollar is still 58 percent of global reserve currencies, and SWIFT handles something like 40 million messages a day. Lucas: They're watching it. But I think the prevailing view in Washington is that this is a slow-moving trend that only becomes a real threat if China opens its capital account fully and lets the yuan float. And there's no sign of that happening soon. Still, the trajectory matters. If you're a multinational treasury manager, you have to start thinking about whether you need yuan accounts, whether you need CIPS access. Luna: And it's not just about sanctions. It's also about cost. SWIFT fees can be significant, especially for smaller transactions. CIPS is cheaper, and it settles in real time. Lucas: That's a point I should have led with. CIPS settles in real time. SWIFT is essentially a messaging system — the actual settlement happens later through correspondent banks, which takes time and adds cost. CIPS combines messaging and settlement. So for a Chinese exporter sending goods to a buyer in Southeast Asia, the money moves instantly. That's a real business advantage. Luna: And that's why countries like Thailand and Indonesia are integrating their local payment systems with China's. We saw a headline recently about Thailand's QR code payment system linking with China's UnionPay. That's consumer-level, but it's the same philosophy. Lucas: It's all part of the same push. And look, if walking through the economy with us has made something click — whether it's this CIPS story or a previous episode — the way these conversations stay ad-free and independent is listener support. If today was useful to you, consider buying me a coffee at buy me a coffee dot com slash fexingo. Seriously, that direct support is what keeps us from having to run ads or chase sponsors. Luna: Yeah, it really does. We put a lot of work into getting these numbers right and making them make sense. So if you're getting value out of it, that's the best way to keep it going. And we appreciate every single one. Lucas: Alright, back to the parallel system. The other piece of this puzzle is the BRICS expansion. The BRICS bloc added Saudi Arabia, Iran, Egypt, Ethiopia, and the UAE in 2024. And one of the explicit goals of the expanded BRICS is to promote local currency settlement. They've even floated the idea of a common BRICS currency, though that's a long shot. Luna: A BRICS currency would require a level of fiscal and monetary coordination that doesn't exist. But what they can do is encourage bilateral swaps and use of each other's currencies. And that's exactly what's happening. Lucas: The numbers back it up. In 2025, China signed or renewed bilateral currency swap agreements worth over 400 billion yuan with about 30 countries. These swaps essentially give central banks access to yuan liquidity without having to go through the dollar market. It's like a financial safety net that bypasses the IMF. Luna: And the IMF has noticed. Their latest data shows that the yuan's share of global foreign exchange reserves has crept up to about 2.8 percent. Still tiny compared to the dollar, but it was basically zero a decade ago. Lucas: Yeah, 2.8 percent doesn't sound like much, but it's growing. And if you look at the composition of the IMF's Special Drawing Rights basket, the yuan is already in there at 12.28 percent. That's a policy choice by the IMF, but it also signals that the yuan is seen as a legitimate reserve asset. Luna: So what's the ceiling here? Could the yuan ever challenge the dollar as the primary reserve currency? Lucas: I think the honest answer is not in our lifetime, and maybe not ever. The dollar has network effects, deep capital markets, the rule of law, and a flexible exchange rate. China has capital controls, a partially state-controlled financial system, and an ageing population that will put pressure on savings. But the question is not binary — it's not dollar vs yuan. It's about a world where the dollar is still dominant but there are more options. And that's already happening. Luna: A multipolar currency system. That's probably where we're headed. More friction, but also more resilience. Lucas: Exactly. And for businesses that trade with China, the practical takeaway is: if you're not already set up to accept yuan payments or use CIPS, you might want to start exploring it. Because the train is leaving the station.