Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China's Yuan Cross-Border Payments Are Bypassing SWIFT
Transcript
- Lucas: So China's yuan cross-border payment system, known as CIPS, hit a new daily processing record last month — over 1.2 trillion yuan. That's up about 45 percent from a year ago. And it's worth pausing on that number because it tells us something real about how trade finance is shifting beneath the headlines. Luna: Forty-five percent in one year — that's not incremental. That's structural. What's driving the spike? Lucas: Two big forces. First, sanctions on Russia created a practical need for an alternative to SWIFT. Chinese banks stepped in to settle energy and commodity trades in yuan. Second, China's trade surplus with the Global South means more counterparties are willing to hold yuan for future purchases rather than convert everything through dollars. Luna: And we're seeing that in the numbers. The yuan's share of China's cross-border trade settled in yuan hit 28 percent in May, according to PBOC data. That's up from 18 percent just two years ago. Lucas: Right. And CIPS now connects over 1,400 financial institutions across 110 countries. The system operates in parallel to SWIFT — it's not trying to replace it overnight, but it gives participants an option. And options matter when you're a central bank in Southeast Asia or Africa thinking about payment reliability. Luna: But let's be honest about the limits. The yuan is still not fully convertible. If you're a trader holding yuan, you can't freely move it into dollars or euros without going through China's capital controls. Doesn't that cap the system's potential? Lucas: It does, but I'd argue the narrative of 'full convertibility or bust' misses the point. China doesn't need the yuan to be a free-floating reserve currency to make CIPS useful. What it needs is for the system to be efficient enough that traders choose it for speed and cost, not just political pressure. And on that front, CIPS is genuinely faster than SWIFT for China-corridor trades — settlement in real time versus one to two days. Luna: Yeah, that's a concrete advantage. SWIFT is a messaging system, not a settlement system — so the actual money movement still takes time. CIPS combines messaging and settlement in one step. Lucas: Exactly. And the PBOC has been expanding yuan clearing banks in places like Kazakhstan, Pakistan, and Brazil. Those hubs let local banks open yuan accounts and process payments without routing through a correspondent bank in New York or London. That's a direct bypass of the dollar system. Luna: So is this mainly about trade with sanctioned countries, or is it broader? Lucas: It started with sanctions, but it's broadening. Look at Saudi Arabia — they joined the mBridge project, a multi cbdc platform for cross-border payments, in June. That's a pilot, but it signals they see value in a non-dollar channel. And China is Saudi Arabia's biggest oil customer. If even a fraction of that oil trade shifts to yuan, the volume through CIPS jumps substantially. Luna: And on the import side, China's buying commodities from Russia, Iran, and increasingly from African producers who are happy to take yuan because they import Chinese goods. So it's a closed loop — they earn yuan from exports and spend it on imports without ever touching dollars. Lucas: Right, and that loop is self-reinforcing. The more trade settles in yuan, the more liquid offshore yuan markets become, which makes it easier for others to join. The Bank for International Settlements actually noted in its June quarterly review that yuan trading volumes in offshore FX markets grew 30 percent year-over-year. Luna: Let's talk about the listener dimension here. If you've been following China's economic strategy with us, you know this is a long game. And our coverage stays ad-free because of listener support. If walking through the numbers with us has made something click, you can help keep it that way at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's a good note. It's a small gesture that makes a big difference for us. Anyway, back to the system — there's a real question about whether the US will push back more aggressively. The Treasury hasn't formally designated CIPS as a sanctions risk, but there's been quiet pressure on correspondent banks that process yuan trades. Luna: And China's response is to keep building. The PBOC just announced a new cross-border wealth management connect scheme for the Greater Bay Area, which will let Hong Kong and Macau residents invest in yuan-denominated wealth products. That creates more demand for yuan, which supports the payment system. Lucas: So the play isn't just about payments — it's about building an ecosystem. The more places you can hold, invest, and spend yuan, the more attractive it becomes to hold it in the first place. That's classic network effects. Luna: We should also talk about the tech. CIPS runs on a blockchain-based architecture for some settlement layers. That gives it built-in transparency and auditability, which is appealing for central banks wary of counterparty risk. Lucas: Good point. SWIFT is moving toward ISO 20022 messaging and experimenting with tokenized deposits, but they're playing catch-up on settlement speed. CIPS already has real-time gross settlement for yuan, and they're expanding to support other currencies on the same platform. The mBridge project includes the central banks of China, Hong Kong, Thailand, and the UAE — so it's not just a China project anymore. Luna: But how big a threat is this to the dollar? I see some analysts saying the dollar's dominance is unshakable because of its depth and liquidity. The yuan market is still a fraction of the size. Lucas: It's not about replacing the dollar. It's about creating a viable alternative for specific corridors. If you're a Thai exporter selling to China, why process through a New York correspondent bank when you can settle directly in yuan in minutes? That's a cost saving and a risk reduction. The dollar will stay dominant for global reserves and commodity pricing for a long time, but the marginal trade — the new trade flows — can be captured by yuan. Luna: And that marginal trade is growing fast. China's trade with ASEAN hit $975 billion last year, up 11 percent. A lot of that is now settling in yuan through local currency swap agreements. Lucas: The PBOC has bilateral swap lines with over 40 central banks. Those lines provide yuan liquidity to foreign central banks, which they can then lend to their commercial banks. So even if a Thai bank doesn't have yuan deposits, they can access yuan through the swap line and settle trades. That's how you build adoption without full convertibility. Luna: There's a geopolitical angle here too. Countries like Pakistan and Sri Lanka have used yuan swap lines to avoid defaulting on Chinese loans. That creates a dependency — but it also proves the system works in a crisis. Lucas: Right. The IMF has actually started including yuan in some of its Special Drawing Rights allocations, and the yuan is already in the SDR basket. That gives it some official global legitimacy. But the real story is the plumbing — the actual payment rails that move money every day. Luna: One data point I want to bring up: the yuan's share of global payments by value, according to SWIFT itself, has risen from about 2 percent in 2022 to 4.7 percent now. That's still small, but it's doubled in four years. Lucas: And that's just swift measured payments. cips processed payments aren't captured in that number. So the actual share of yuan-denominated cross-border payments is likely higher. The PBOC has been encouraging banks to route trade through CIPS rather than SWIFT. By some estimates, CIPS now handles about 20 percent of China's cross-border payments. Luna: So where do we see this heading by, say, 2030? Lucas: I think we'll see the yuan become the primary settlement currency for China's trade with Southeast Asia, Central Asia, and parts of Africa. That's maybe 25 to 30 percent of global trade flows. Not dollar-dominant territory, but a meaningful multi-currency system. And the US will have to decide whether to tolerate it or try to block it. Luna: Blocking it would be hard without disrupting trade with China itself, which is still the world's second-largest economy and the largest trading partner for many countries. Lucas: Exactly. That's the tension. The tools the US used against Iran and Russia — cutting off SWIFT access — are less effective when a parallel system exists. So China's long game is to make CIPS resilient enough that any attempt to isolate China from the dollar system would simply accelerate yuan adoption. That's the strategic hedge. Luna: And for now, the system is working. CIPS processed over 2 quadrillion yuan in the first half of 2026, up 40 percent year-over-year. That's real volume, not just headlines. Lucas: It's worth watching how the US responds in the next six months. The Treasury's annual report on international economic and exchange rate policies is due in October, and it usually flags currency manipulation concerns. China has been careful not to devalue the yuan aggressively, but the system itself might draw scrutiny. Luna: Alright, we'll keep tracking it. That's all for today on China Economy with Fexingo. Lucas: Thanks for listening. We'll be back tomorrow.