[BRI Report]Payment and Settlement of the BRI III

Editor's note: Since its establishment, as a regional, non-governmental, non-profit international organization in the field of finance, the Asian Financial Cooperation Association (AFCA) has been committed to promoting experience and information sharing among various financial industries and fields in the BRI region, building an international platform for financial business exchange and cooperation and common governance. AFCA, on the  basis of Belt and Road Financial Cooperation Committee (BRFCC), conducts Asian Financial Cooperation Association Belt and Road Financial Cooperation Practice Report. With the business sector as the entry point, the report systematically reviews the cooperation in recent years, deeply analyzes relatively prominent problems and challenges, and offers practical suggestions in line with the actual needs of partner entities.

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Chapter 6 Payment and Settlement of the Belt and Road Initiative

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Suggestions for Payment and Settlement in the Belt and Road

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Establishing a diversified cross-border payment and clearing system is the key to ensuring the efficient and safe financing of cross-border funds between countries along the route. Given the above problems and challenges, and considering the current situation of Belt and Road payment and settlement, the relevant policy recommendations are as follows.

01

Develop and improve payment and settlement infrastructure that is more secure, convenient, standardized and in line with international standards

The proportion of INSTEX and CIPS in the cross-border payment and settlement of countries along the Belt and Road should be increased to gradually reduce the reliance on SWIFT and reduce the potential risk of black swan events that threaten the security of payment and settlement and financial security. At the same time, countries along the Belt and Road should also actively use the rules of international organizations and enhance their voice in international clearing mechanisms such as SWIFT under the multilateral framework. In addition, the countries along the route should meet international standards such as the Principles for Financial Market Infrastructures, strengthen exchanges and cooperation with rule-making bodies such as the Committee on Payment and Market Infrastructures (CPMI). Moreover, they should develop payment and settlement infrastructures and enhance the international compatibility of diversified cross-border payment and settlement systems to facilitate the seamless transition of payment and settlement systems in countries along the Belt and Road route in the future.

02

Strictly regulate the risks of emerging payment methods, strengthen the basic research of CBDC, and accelerate the research and development and pilot promotion of CBDC

We should closely supervise cryptocurrencies, stable coins and other digital currencies with high risks and ban their use as payment and settlement methods, especially in countries along the Belt and Road with high risks and vulnerabilities. Digital currencies with unstable values will overlap with these countries’ economic and financial vulnerabilities and reinforce each other, forming a vicious cycle that will seriously disrupt the financial markets of countries along the route and China and seriously impact the existing payment settlement system. The main reasons are as follows. The use of currency is featured by stickiness and the winner-takes-all. Against the background that many central banks are developing and proposing to launch CBDC, countries along the Belt and Road should seize the first-mover advantage. CBDCs can be used to reshape the international monetary system and contribute to a multi-polar global monetary system. In addition, the application of CBDC to the Belt and Road payment and settlement can deepen the financial cooperation among the countries along the route and accelerate the regional integration process. Therefore, countries along the route can strengthen the research on the basic concepts, legal status, and scope of use of CBDC and take the lead in formulating regional international standards to enhance the right to speak. Taking CBDC as an opportunity, countries along the Belt and Road will explore the application of CBDC in Belt and Road payment and settlement by strengthening experience exchange, discussing cooperation demonstration, enriching cooperation framework, and improving regional supervision, so as to enhance the security, inclusiveness and efficiency of payment and settlement and to cater to the construction of the Belt and Road.

03

Steadily and orderly promote the opening up of capital projects and expand the opening up of the financial industry at an appropriate time and in a proper manner

Given each country’s industrial structure and economy, the degree of two-way opening of countries along the Belt and Road should be increased at an appropriate time and in a proper manner. For example, China can accelerate the free convertibility of the RMB, which is a move to expand the RMB scale and a means to force the upgrade of the cross-border RMB payment and settlement system. China can also lift the restrictions on investment quotas for Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII). It can also relax the restrictions on the ratio of local and foreign currency remittances for foreign institutional investors and steadily promote the two-way opening of the capital market. A capital market with broad participation and depth will increase the attractiveness of RMB assets. The increase in the scale of RMB-related business will force the construction of the payment and settlement system, which will benefit the payment and settlement of countries along the Belt and Road from the supply side. In addition, the construction of the RMB payment and settlement system will also increase the diversification of the payment and settlement system in the countries along the route, which will hedge the risks arising from the high concentration of currencies.

04

Improve the legal framework and monitoring system of cross-border payment settlement

In terms of legal framework, the regulatory agencies of countries along the Belt and Road should cooperate and issue legal regulations and operational guidelines related to cross-border payment settlement as soon as possible. Such actions need to be taken to solve the lack of responsibility of regulatory bodies, unclear regulatory boundaries and regulatory gaps at the source. Notice on Further Optimization of Cross-border RMB Policy to Support Stable Foreign Trade and Foreign Investment jointly issued by six departments, including People’s Bank of China, the Development and Reform Commission and the Ministry of Commerce, points out that further simplification of cross-border RMB settlement and support for cross-border RMB settlement of new trade patterns is a reasonable attempt, although coordination and cooperation with other domestic and foreign regulatory authorities are still needed. BRI countries are characterized by complex and changing political and economic environments, intertwined country risks, underdeveloped financial systems, relatively weak capital strength, serious debt problems, and foreign exchange controls. A joint sharing mechanism should be set up in multiple departments of the payment and settlement field in terms of the monitoring system. Big data, artificial intelligence and other financial technologies should be introduced to monitor cross-border payment and settlement. Efforts need to be made to more effectively explore the implementation of full-coverage, penetrating and off-site regulatory monitoring, improve the ability to predict, detect, locate and dispose of risks. Moreover, a monitoring system before, during, and after the event should be built to resolutely crackdown on cross-border payment and settlement for financial crimes.

05

Optimize the main structure of cross-border payment and settlement systems applied by countries along the Belt and Road, and welcome qualified third-party institutions to enter the cross-border payment and settlement market

Compared with SWIFT, CIPS is still in the initial development stage, and the main structure of CIPS is dominated by cross-border e-commerce. It is necessary to attract more multinational enterprises to join through preferential rates, expansion of service types and improved timed net settlement mechanism. At the same time, it is necessary to increase the penetration of other major currencies in import and export trade and commodity valuation to create a diversified cross-border payment and settlement system and enhance the stability and sustainability of the payment and settlement system. In addition, third-party payment institutions have the advantages of relatively low threshold, extensive retail business coverage, innovation and high efficiency. Based on adequate background investigation and legal compliance, third-party payment institutions with the ability and willingness to comply with the regulations should be included in the cross-border payment and settlement ecosystem to support the Belt and Road payment and settlement jointly.