Electronic Payments Boost Renminbi Business

By Li Honghan and Tan Chang

Cross-border capital flows via the Internet are comprised of cross-border income and cross-border payments.

C ross-border electronic payments are an important link in the circulation of credit and currency, and have a key role in promoting the internationalization of the renminbi. This article examines the relationship between cross-border electronic payments and renminbi settlement and discusses the process of cross-border electronic foreign exchange collection and payment. It also looks at the rapid development of cross-border electronic payments, and how this can facilitate renminbi settlement of cross-border trade.

Cross-border Electronic Payment and Renminbi Settlement

The process of currency internationalization is largely an extension of the functions of a modern currency. An international currency has three major functions, namely as a bookkeeping unit, a transaction medium, and a means of storing value. Cross-border electronic payments are closely related to these three functions. The process of currency internationalization generally goes from settlement currency to investment currency and then reserve currency. Crossborder electronic payments are closely related to two of the major functions - as a transaction medium and a bookkeeping unit in the private and of fi cial sectors. Third-party payment platforms connect the functions of transactions and accounting between the private sector and the of fi cial sector through crossborder electronic payments, and at the same time build a new means of making settlement of crossborder trade using renminbi.

Cross-border capital fl ows via the Internet are comprised of crossborder income and cross-border payments, and this naturally requires foreign exchange settlement and sales. Cross-border e-commerce generally processes cross-border payments and cross-border income through a third-party payment platform. The third-party payment platforms make aggregated purchases of foreign exchange.Some overseas electronic payment companies support the overseas online payment using bank cards from China in order to expand their footprint in China’s huge online payment market. Cross-border payment and cross-border income are closely related to renminbi settlement of cross-border trade.

In 2013, 17 domestic third-party payment platforms such as Alipay,Tenpay, China UnionPay, ChinaPnR,and Tongrongtong were included in the fi rst batch of participants in the pilot cross-border electronic payments trial program. Domestic third-party payment platforms began to participate widely in e-commerce transactions. In January of 2015, the State Administration of Foreign Exchange (SAFE) launched a nationwide pilot program for crossborder foreign exchange payments involving payment agencies.The number of participating companies has since expanded from the original 17 to 269 with payment business licenses. These payment agencies are permitted to provide foreign exchange funds collection and settlement in crossborder e-commerce transactions.Payment platforms can collect foreign exchange orders from both sides of a transaction in smallsum e-commerce deals. Foreign exchange settlements are then processed through banks.

Table 1 Third-party Payment Platform Companies Participating in Cross-border Payment Markets (Partial List)

According to the original payment policy, in the process of cross-border electronic transactions,foreign trade payment and settlement services provided by the third-party payment platform mainly needed to use US dollars for settlement in Hong Kong. The customer then transferred funds to the China mainland through other channels. After SAFE initiated a cross-border electronic payment service, the third-party payment platform could directly process settlements for customers in China.The launch of the cross-border third-party payment platforms has provided more convenient and effective services for a range of transactions such as overseas education, airline ticket services,hotel accommodation and other customer needs. The domestic third-party payment platform can therefore provide more services for customers and allow the expansion into new businesses. At the same time, the areas and types of renminbi cross-border settlement activities have been expanded.

According to the new Payment Business License, third-party payment platforms that obtain pilot foreign exchange payment licenses can provide collection and settlement services for foreign e-commerce trading parties through banks. The third-party payment agencies of the Shanghai Free Trade Zone have extended the Internet payment business offshore and established a real-time cross-border electronic payment processing platform to meet customer demand. This makes use of thirdparty payment platforms for retail transactions, facilitating overseas shopping.

Alipay teamed up with fi nancial institutions such as Bank of China in August 2007, jointly launching cross-border payment and settlement services. Since 2009, Alipay has cooperated with VISA and MasterCard to facilitate operations in Chinese territories of Hong Kong, Macau and Taiwan,allowing cardholders to make purchases through Taobao.com,completing the network for two-way cross-border payment services. As of now, Alipay’s crossborder payment services cover 34 countries and regions around the world, supporting over 12 foreign currencies, including the US dollar,euro, pound sterling, and Swiss franc. In June 2012, Alibaba signed a strategic cooperation agreement with qiwi wallet, an electronic payment company in Russia, as part of an effort to develop the markets in countries participating in the strategic development program, the Belt and Road initiative. Buyers in Russia were able to recharge their qiwi wallet account to access Alibaba’s PayPal. After purchasing a product,the seller can make shipment once the payment appears in the system. At present, China’s thirdparty payment platforms have been actively involved in crossborder e-commerce transactions(see table1 ).

With the improvement of China’s import and export trade and the rapid development of crossborder e-commerce, more crossborder e-commerce payment opportunities have emerged. At present, cross-border payments for individual users in China are mainly cross-border retail purchases or cross-border money transfers and remittances. Consumers using the Internet for cross-border purchases account for 65.7% of all transactions. Moreover, some 39.5% of Internet users frequently make cross-border payments. As the application of Internet technology in modern society is becoming more and more widespread,cross-border trades between consumers shopping online and merchants doing cross-border business have become increasingly frequent. As a result, cross-border electronic payment services of third-party payment platforms have been developing at a rapid pace. Transactions have become paperless with a separation of trading counterparties. Meanwhile,purchase and settlement methods have gradually become more diversi fi ed. In 2013, China’s largest third-party payment platform,Alipay, made a total of US$1.5 billion in cross-border payments.While that is an impressive sum, it is still only 5% of China’s total crossborder e-commerce. The remaining market share is dominated by other overseas payment companies, such as Paypal.

Cross-border Electronic Payment Promotes Renminbi Settlement

As cross-border e-commerce promotes the growth of China"s foreign trade, payment activities will inevitably involve the use of renminbi. In July 2009, China began to promote renminbi settlement in cross-border trade on a trial basis.The pilot programs were expanded from four provinces and cities,including Shanghai and Guangdong province, to the entire country, and eventually offshore. The settlement amount of cross-border trade increased from 506.1 billion yuan in 2010 to 4.63 trillion yuan in 2013 and 3.27 trillion yuan in the fi rst half of 2014. In May and June of 2014,the State Council announced its 16 New Rules Concerning Foreign Trade and the People’s Bank of China unveiled its Several Opinions on Supporting the Stable Growth of Foreign Trade. These supported the promotion of renminbi settlement in cross-border trade. In the fi rst half of 2015, the State Council issued four more documents to support the development of cross-border e-commerce, thereby demonstrating the important role in promoting renminbi settlements in crossborder trade.

There are three requirements for third-party payment platforms in conducting renminbi payments in cross-border trade. First,overseas merchants on crossborder e-commerce platforms must be willing to accept renminbi settlement. Second, overseas banks must be willing to help third-party payment platforms open renminbi accounts and third, overseas consumers must be willing to pay in renminbi.

In 2013, authorities managing renminbi payment and settlements-- the State Administration of Foreign Exchange and the People’s Bank of China -- opened two major channels in accordance with the characteristics of crossborder e-commerce retail sales.First, the pilot programs of cross-border foreign exchange payment settlements on the thirdparty payment platform were launched in September 2013. As mentioned earlier, there were 269 companies that had obtained pilot quali fi cations as of 2015. Taking advantage of the new opportunities,most third-party payment platforms provided cross-border foreign exchange payment settlements for services such as merchandise trade, overseas study, airline tickets, and hotel accommodation.Second, in February 2014, cross-border renminbi payment service was launched in the Shanghai Free Trade Zone. The Shanghai Headquarters of the People’s Bank of China has issued its Opinions on the Implementation of Crossborder Renminbi Payment Services by Shanghai Payment Institutions.The payment institutions relied on Internet channels to provide foreign exchange services between domestic and foreign entities but there was a ban on netting operations. Currently, www.chinapay.com, www.allinpay.com,www.easypay.net, www.99bill.com and www.shengpay.com can conduct renminbi settlement in cross-border trade in the Shanghai Free Trade Zone. Five payment institutions have signed cross-border renminbi payment agreements with Shanghai branches of fi ve commercial banks, namely Industrial and Commercial Bank of China, Bank of China, China Construction Bank, China Merchants Bank, and Minsheng Bank.

Developing Cross-border Electronic Payment Paths

The construction and development of cross-border electronic payments is a new breakthrough in renminbi settlements and can be promoted through the following paths:

Path I: Encouraging the Establishment of Third-party Payment Platforms, Financial Institutions and Settlement Centers in Various Regions

Chinese commercial banks have been encouraged to set up branches in Central Asia,open local currency settlement accounts with foreign banks, set up renminbi exchange of fi ces and provide automatic deposit and withdrawal equipment according to regional conditions. This is designed to provide fi nancial services for the use of renminbi in Central Asia, and promote development of cross-border renminbi settlement business.At the same time, a uni fi ed renminbi settlement center will be established in Central Asia,with a safe and effective renminbi settlement system established to facilitate renminbi settlements along what is called the Silk Road Economic Belt.

With the implementation of the Belt and Road Initiative, a major development strategy, the upgrading of the economy and a further opening up to the outside world has been accelerating. This has brought many opportunities for third-party payment platforms to promote the development of renminbi settlement business in countries participating in the Belt and Road Initiative.

First of all, the implementation of the Belt and Road Initiative strategy will signi fi cantly accelerate the process of renminbi internationalization and provide an opportunity for the development of cross-border renminbi settlement services in the payment industry.Payment business is important in fi nancial institutions. Financial institutions are natural agencies for issuing payment instruments and collecting documents. Their development will directly lead to the improvement of the industrial infrastructure in those countries taking part in the Belt and Road Initiative.

Second, cooperation and exchanges in information technology and emerging industries in the region have become more frequent, and there is ample room for the development of third-party payment industry technology.China, with a large potential market for the payment industry, has strong complementarities with other countries, and this offers much room for cooperation. Thirdparty payment platforms have been expanding their business scope and enhancing their own business capabilities by adopting new technologies and information.

In addition, there has been a deepening of cooperation in political, economic and cultural spheres. Moreover, there has been a rapid development of regional cross-border tourism, as well as commerce and overseas study.This will lead to substantial growth in cross-border online and of fl ine payments. Growth in tourism spending in the countries served by the Belt and Road Initiative will also expand cross-border e-commerce and cross-border online payments.Thus, third-party payment platforms can make full use of this opportunity to expand renminbi payment services in cross-border trade and promote the development of renminbi settlement services across this region.

Path 2: Promoting Crossborder Electronic Payments with Kazakhstan

In order to promote crossborder e-commerce and crossborder electronic payments,China need to fi nd a breakthrough area in the Central Asia. Among the fi ve Central Asian countries,Kazakhstan, is China’s largest trading partner in the region, with the strongest economy. After Kazakhstan and China’s Xinjiang region launched a pilot program for renminbi settlement in crossborder trade, it has realized direct exchange of renminbi and the Kazakhstan tenge, which prepared the conditions for promoting renminbi operations in Kazakhstan.

Path 3: Reciprocal National Currency Exchange Agreements and Renminbi Return Mechanism

China will strengthen consultations and exchanges with countries along the Belt and Road Initiative, establish multi-level and wide-ranging cooperative relations, and expand the signing or improvement of bilateral currency swap agreements with Central Asian countries. At the same time, China will further develop bilateral monetary settlement mechanisms and expand the use of capital based on the actual conditions in countries served by the Belt and Road Initiative.

However, the limited channels for returning renminbi to China have greatly limited the use of the currency for settlement purposes in Central Asia. Key breakthroughs are needed in this area. It is necessary to relax restrictions on the out fl ow of renminbi by allowing companies and individuals in countries participating in the Belt and Road Initiative to open renminbi accounts directly in Chinese banks. It is also necessary to make greater use of the CIPS payment settlement system promoted by the People’s Bank of China. Overseas banks are encouraged to join the system as participating banks while domestic banks are encouraged to provide renminbi loans to quali fi ed companies or projects overseas,in order to promote the use of renminbi in neighboring countries.It is also necessary to establish regional fi nancial markets that include countries participating in the Belt and Road Initiative by providing a variety of fi nancial instruments to promote the circulation of renminbi at home and abroad.

Path 4: Strengthening International Cooperation in Cross-border E-commerce

The target groups in crossborder e-commerce are offshore.Cross-border e-commerce companies have encountered a series of problems during the development process, such as the long Customs clearance time at Russian Customs and the loss of goods. Therefore, it is recommended that China and countries participating in the Belt and Road Initiative promote crossborder e-commerce transaction rules and terms, including crossborder e-commerce Customs clearance service support systems, as well as postal delivery inspections, quarantine supervision and management,and product quality traceability mechanisms. The establishment of a comprehensive international cooperation mechanism for cross-border e-commerce will create the conditions needed for China to conduct crossborder e-commerce activities at home. During the bilateral and multilateral free trade area negotiations in the establishment of the Regional Comprehensive Economic Partnership (RCEP),full consideration should be given to the development of cross-border e-commerce enterprises in China and the use of standards and systems of the World Trade Organization and other international organizations for cross-border e-commerce.These can be used by domestic enterprises to settle trade disputes. Terms of the measures for using renminbi on international and domestic e-commerce websites should be added in a timely manner.

In short, cross-border electronic payments have expanded the scope of renminbi settlement, especially in the areas of cross-border e-commerce and cross-border consumer purchases. This has had a positive effect on the growing use of the renminbi for settlements and accelerating the internationalization of the renminbi. In particular,among the countries included in the Belt and Road Initiative, many countries with excellent basic trade conditions have close contacts with China. This is conducive to the rapid development of cross-border electronic payments and can better stimulate cross-border renminbi settlements.

Li Honghan, research fellow at the Center for Industrial Upgrade and Regional Financial Collaborative Innovation at Zhongnan University of Economics and Law Tan Chang, master in fi nance at Zhongnan University of Economics and Law