Payment Systems in China

1. Institutional Aspects

1.1 General legal aspects

Under the Law of the People’s Bank of China 1995, the People’s Bank of China (PBC) as central bank, has three main functions: to formulate and implement monetary policy, to exercise banking supervision and regulation and to provide payment settlement services.

The legal responsibility of the PBC in the payment system is to “organize or assist financial institutions in settling inter-institutional obligations, coordinating such activities and providing such services", and "to maintain the smooth and professional operation of payment, clearing and settlement systems".

The Commercial Banking Law 1995 requires commercial banks to make and settle payments in a timely manner. The PBC is authorized to examine and supervise the settlement process. Commercial banks are required to provide financial accounting information, business contracts and other information about their business and management.

Interim Regulations on Control of Currencies 1988 specify limits on cash holdings and the areas of cash usage.

The Documentation Act governs the use of bills in China, including the main credit payment instruments - bills of exchange, cashiers’ cheques, cheque standards for endorsement, acceptance, guarantee, payment etc. It establishes the rights and obligations of the parties to bills and the implications of violating the law.

In addition to the laws and regulations applicable to the whole country, some regulations apply to special organizations. Post Remittance Funds Clearing Rules 1993 regulate the opening and operating of bank accounts of post remittance funds, cash receipt and disbursement, clearing of postal remittance funds etc.

Rules on Administration of Bank Accounts 1994 stipulate bank account structure, requirements for opening etc. Deposit accounts consist of fundamental accounts, general deposit accounts, temporary accounts and specific accounts. Accounts other than specific deposit accounts can be used for settlements. Depositors must hold enough funds to ensure payment. "Banks shall maintain the depositors’ right to manage their funds freely, not permit any organization or individual from investigating, freezing, withholding or transferring a savings deposit, unless it is otherwise defined by the law and is authorized by the State Council."

The Rules on Administration of Credit Card Business stipulate the business rules governing business management, credit card applications and cancellations, and legal liabilities etc.

1.2 Financial intermediaries that provide payment services

Banks and the PBC are the principal suppliers of payments services. The banking system is composed of the four major state commercial banks, a dozen smaller commercial banks, a large number of Urban Credit Cooperatives (UCC) and Rural Credit Cooperatives (RCC)(the cooperatives are being consolidated into banks), the joint-venture banks and the offices and branches of foreign banks. Three policy banks also provide some payment services.

The four state-owned commercial banks have set up their own nationwide electronic intrabank payment systems, which handle about two-thirds of all non-local payment transactions.

The PBC operates three interbank payment systems, namely, more than 2000 Local Clearing Houses (LCH), a paper-based non-local funds transfer system and National Electronic Interbank System (EIS). The central bank’s payment systems are the only means available to the smaller banks (including UCCs and RCCs) which do not have their own payment network to execute payments to other banks on behalf of their customers without having to depend on their competitors.

1.3 The role of other private and public sector bodies

1.3.1 Postal savings and remittance bureau

The Post Law article 2.2 identifies postal savings and postal remittance as financial businesses. Because the Post Savings and Remittance Office is an extensive network, and its focus is on ordinary individuals, it plays an important role in retail payment services.

1.3.2 City bank card companies

By the end of 1996, there were dozens of City Bank Card Companies operating City Bank Card Information Exchange Centres. A National Bank Card Organization which would operate the National Bank Card Information Exchange Center is planned.

The National Bank Card Information Exchange System consists of the National Bank Card Information Exchange Centre, a number of City Bank Card Information Exchange Centers, every intrabank card center of commercial banks and issuing bank processing centers. Its role is to exchange payment card information and provide the necessary clearing information to the payment system network.

2. Interbank Payment Systems

2.1 General overview

Since 1979 China’s previous mono-bank system has been transformed into a two-tiered banking system consisting of the People’s Bank of China (PBC) as the central bank and many other providers of financial services such as four major state-owned commercial banks, public-owned commercial banks, cooperative banks, policy banks and branches and representative offices of foreign banks.

To complement the establishment of the two-tiered banking system, payment systems in China have changed from an accounting mechanism for keeping a record of centrally-planned economic activities into a payment system suitable to a market-oriented economy.

Evolution of China’s payment systems has been influenced by the environmental and cultural factors as well as the difficulties imposed by the country’s size, economic conditions and infrastructure etc. Two of the most important features have been the banking structure and PBC account structure.

2.1.1 Banking structure

The Chinese banking structure is more complex than it appears on the surface. While there are only a few separate major banking institutions, each state-owned commercial bank has many branches which operate under a well defined hierarchy based on geographical territory. In many respects, each territory and even each branch operates almost as if it is a separate entity. Thus, standards and procedures within a banking organization may differ from region to region, and most major branches, even at the county level, have separate accounts with the PBC. Thus, each branch with a PBC account represents a separate payments processing point; resulting in a vastly more fragmented payments environment than is suggested by simply counting the number of major commercial banks.

2.1.2 PBC account structure

The structure of commercial bank accounts held with the PBC plays an important role in the clearing and settlement of payment transactions. The hierarchical structure of the PBC and major commercial banks are similar, with each bank system organized along the following lines:

National Head Office (1)

Provincial (Major city) Head Office (46)*

Regional Head Office (Approx’ 330)*

County Branches (Approx’ 2000)*

County Sub-branches (Optional)

(* Number of PBC offices. The number of offices for each commercial bank varies.)

At each level, commercial banks hold accounts with their corresponding PBC branch. As a general rule, commercial banks do not hold accounts with each other, nor do branches of each commercial bank hold accounts with other branches of the same bank on the same level or higher level. There are exceptions to this general rule, as follows:

Rural and urban cooperatives used to hold accounts with their respective local ABC and ICBC branch office respectively. Since 1996 some cooperatives have combined to form Rural or Urban cooperative banks, these new cooperative banks hold a consolidated account with their local PBC.

County Sub-branches of commercial banks may have an account relation with their bank’s local county main branch.

In some cases, such as Tianjin, County branches hold an account and clear items through their county head office.

Each main commercial bank branch holds three accounts with its corresponding local PBC office:

A Reserve Account, currently equal to 13 per cent of deposits. The reserve account is a sterile balance, not used for clearing purposes and is adjusted generally every 10 days for changes in deposit levels at the commercial bank branch.

A Deposit/Savings (Clearing) Account, currently targeted at 5 per cent to 7 per cent of the bank’s deposits. This account is used for clearing and settlement purposes.

A Loan Account established between the commercial bank and the PBC which provides a level of authorized credit available from the PBC to the local commercial bank branch. The amount of the total available credit is established by their bank’s head office and its total amount and allocation across the commercial banks and territories is a primary vehicle for the application of monetary policy.

Interest is paid on both the Reserve and Clearing accounts, but at a rate below market.

Settlement for payment transactions, which is described in some detail below, is made by the transfer of commercial bank branches’ clearing account balances at or between PBC branches. Because accounts are not held between banks, branches or PBC offices at the same level, settlement transfers often require the movement of funds to higher levels of PBC offices.

2.1.3 Payment systems overview

The Chinese payment system is made up of six sub-systems:

Paper-based Non-local Fund Transfer Systems

Electronic Interbank System (EIS)

Local Clearing Houses

Electronic Intrabank Clearing Systems

Internal Card-based Payment Systems (ATM and Debit Cards)

Post Office Clearings

While the instruments used in each of these sub-systems are separate, there is an interface between local and non-local intra/inter-bank clearings. All non-local paper-based interbank payments must first be cleared and settled between commercial banks on a local basis through the local clearing house and then cleared within the commercial banks non-locally via the intrabank clearing mechanism. This so-called "first-horizontal (interbank) and then-vertical (intrabank)" payment processing procedure was dominant until 1996, when the PBC’s EIS was expanded to cover 600 PBC branches and sub-branches. Using the EIS, non-local interbank payments can be cleared and settled via EIS without resorting to the awkward "first-horizontal-then-vertical" processing procedure.

Since 1996, most non-local intrabank payments have been cleared through electronic intrabank fund transfer systems operated by four major commercial banks. Further details of these sub-systems are described in section 2.5.

2.2 The National Electronic Inter-bank System (EIS)

2.2.1 Functioning rules

The EIS system is based upon the use of VSAT satellite transmission to and from the PBC Central Processing Site near Beijing. Some 600 branches are connected by the system at this time, with plans to connect 2000 branches nationwide. The system base been designed to handle the future processing of both interbank and intrabank debit and credit payments. By the end of 1996, the EIS processed 30000 fund transfer transactions daily, with a value of RMB30 billion.

2.2.2 Participation in the system

All commercial bank branches with an account at a PBC branch, together with the branches of PBC itself, can participate in EIS for execution of their own payments and those of their customers. All the participants in EIS are also the participants in Local Clearing Houses. The PBC owns and operates the system.

2.2.3 Types of transactions handled

Only credit transfer transactions between the participants are handled by EIS at the present time: these include non-local interbank and intrabank transfers and transfers between PBC branches.

2.2.4 Transaction processing environment

The EIS is a decentralized system in a sense that all the accounting activities (both crediting and debiting an account) take place in in-clearing PBC branches and out-clearing PBC branches, while the Central Clearing Center Serves mainly as message switching site.

The EIS design addresses China’s unique communication problems by using satellite technology. A single, dedicated network based on satellite technology has been installed. Mainframe computers at the national clearing center are linked to a PC-based account processing system used by the Accounting Department at each PBC branch.

2.2.5 Operation of the transfer system

The EIS system works as follows:

The sending (Outward Remitting) bank sends payment instructions to its local PBC (Out clearing) center intermixed as to final receiving PBC branch (In clearing bank).

The payment transactions are entered into the EIS system by the Outclearing PBC branch which sends the payment instruction by satellite transmission to the National Clearing Center.

The National Clearing Center (essentially a transfer center) sorts the payment entries by Inclearing PBC branch and transmits them via satellite to the designated PBC office.

The Inclearing PBC office receives the payment instruction and sorts by Inward Remitting bank.

Individual payment vouchers, for each item, as well as payment listings of all items destined for each inward remitting bank are produced by the Inclearing PBC office and sent to each inward remitting bank

A project connecting EIS remote VAST stations, the PBC Accounting System and the in/outward remitting banks is under way.

2.2.6 Credit and liquidity risk

In accordance with the PBC EIS regulation, credit transfers in EIS are executed only if there is sufficient cover. The Outward Remitting Bank’s account is debited before the payment is routed. Single order or batches for which there is insufficient cover remain in a queue until receipt of cover. Thus the Inward Remitting bank is not exposed to credit or liquidity risk and it can make the funds received available to the beneficiary unconditionally.

2.2.7 Pricing

At the present time, PBC has not sought to recover the investment and the operating cost by charging the participants for making payments through EIS. Therefore the fee for making an EIS transaction is rather low at RMB4.50 per transaction.

2.2.8 Main projects and policies being implemented

As EIS coverage has expanded, the volume of payment orders submitted to the EIS has risen rapidly. A project to connect PBC county branches to EIS is under way. It is planned to cover all the major county PBC branches by the end of 1997. In addition, PBC is connecting EIS with LCHs. A feasibility study for handling Debit transfer through EIS is under way, and a pilot project will be launched in 1997.

2.3 Paper-based non-local funds transfer systems

2.3.1 Functioning rules

The separate intrabank (between branches of the same bank, i.e. both commercial banks and the PBC) clearing mechanisms are used to effect payment for paper-based non local items. In many respects, these intrabank clearing mechanisms are analogous to the interbank clearing system in western countries. The basic framework for all intrabank clearings is the same, although the exact procedures may vary slightly by bank, payment instrument and the geographic location of the sending and receiving bank.

Before 1996, each of the four major commercial banks and the PBC had its own paper-based intrabank clearing system. By the end of 1996, all the four major commercial banks replaced their paper-based intrabank clearings with new electronic intrabank fund transfer systems. However, the PBC still runs its own paper-based non local system for clearing and settlement of paper-based interbank payment transactions as well as funds transfers between PBC branches. Because the new electronic intrabank fund transfer systems are basically automated versions of the old paper-based systems, it makes sense to describe these paper-based non-local clearing systems for a better understanding of the current China payment systems.

2.3.2 Participation in the system

As their name indicates, all the participants in the intrabank clearing mechanism are branches of the same bank. Not all bank branches are eligible to participate in the national level clearing. Only branches with more than a defined number of national payments per day can participate.

2.3.3 Types of transactions handled

For commercial banks’ intrabank Clearing System, both credit and debit items are handled.

For PBC’s intrabank system, the transactions handled through the system are: fund transfers between PBC branches, treasury payments and high-value (larger than RMB500,000) fund transfers between branches of the same commercial bank.

2.3.4 Operation of the transfer system

The physical exchange of instruments is generally done by mail or telegraph directly between the sending branch and the receiving branch, irrespective of location.

The sending branch posts the totals of payments sent to any one of three separate accounts depending upon whether the item is cleared at the national, provincial or county level.

Procedures differ slightly between banks, and are also dependent on the clearing level concerned. However, generally, multiple copies of the IBRB forms are used for checking and reconciliation purposes.

2.3.5 Settlement Procedures

(See Section 2.6)

2.3.6 Credit and liquidity risk

All the four intrabank clearing systems run by the four major commercial banks clear the payment transactions and compute the net position for each branch; settlement is through PBC’s intrabank system.

As all the participants in an intrabank clearing system are the branches of a same bank, they are generally not exposed to credit risks. However, they are exposed to liquidity risk. Although the multipart Intrabank Report Bill is used to verify and reconciliate the transactions, the system cannot guarantee that a payment order is executed only if there is sufficient cover.

For interbank payment transactions processed by PBC’s system, the cover principle applies, i.e. a commercial bank branch can send a payment order only if there is sufficient balance in its clearing account.

2.3.7 Pricing

No fee is charged to the participants using the system for funds transfer. However, banks have to pay the Post Office for physical exchange of payment instruments by mail or telegraph.

2.4 Local Clearing Houses (LCHs)

2.4.1 Functioning rules

There are approximately 2000 local city and county level clearing houses throughout China. All local interbank and most local intrabank payments are exchanged and settled through local clearing houses. In addition, paper-based non-local interbank payments are first exchanged and settled between commercial banks through the local clearing houses before being processed across geographic lines.

2.4.2 Participation in the system

Most bank branches within the local clearing area participate directly in the local clearing and settlement process. Depending on the procedures agreed by the members of the local clearing house:

clearing accounts for settlement purposes may be established for each individual member branch; or

some smaller branches of the commercial banks may settle through the clearing account of their bank’s principal local branch; or

one clearing account may be opened for each commercial bank, through which each of its local branches clears. (This is increasingly the trend because of the greater efficiency of control of clearing balances).

The City Cooperative Bank (CCB) holds a consolidated account for its members to exchange and settle payment items through LCHs.

2.4.3 Types of transactions handled

Both credit and debit items are exchanged and settled, with cheques dominant. In accordance with the Documentation Act, cheques are permitted for local payments only.

2.4.4 Operation of the system

The PBC owns and operates the local Clearing Houses, providing oversight and settlement services to the clearing house members. Items are exchanged between clearing house members and each branch computes a net settlement balance based upon all debit and credit items sent and received through the clearing house.

Larger city and county clearing houses operate both a morning and afternoon exchange, while smaller cities and towns may only operate a morning exchange.

2.4.5 Transaction processing environment

In general, participant bank branches deliver paper-based instruments pre-sorted by received bank to the clearing house. As the volume of payments transaction increases, more and more Clearing Houses have installed computers to facilitate the netting process. In some large cities, for example, Guangzhou, Shanghai and Tianjin, reader/sorter equipment has been installed to speed up the exchange of paper-based items. A small number of cities are testing for exchange of payment data through telecommunication lines.

2.4.6 Settlement Procedures

(See Section 2.6)

2.4.7 Credit and liquidity risk

The PBC accepts the settlement only when the net of all bank settlement equals zero. The cover principle applies, i.e. the originator’s account is debited before the funds are credited to the beneficiary’s account (or debit and credit occur simultaneously in the books of the PBC branch). The payment is final once the account has been credited. In principle, therefore, the execution of the payment does not give rise to any credit or liquidity risk.

2.4.8 Pricing

The LCHs are operated on a non-profit-making basis. Participants share the operational costs; fees are based on the volumes exchanged through the clearing house.

2.4.9 Main projects and policies being implemented

It is expected that clearing house automation will be improved greatly in the future. At the present time, nearly one half (49 per cent) of all interbank and intrabank payments transactions are processed through LCHs. In the future, greater use will be made of reader/sorter facilities and magnetic media data communication networks.

2.5 Electronic intrabank clearing systems

Since the end of 1996, all the four major commercial banks, i.e. the Industry and Commercial Bank of China (ICBC), the Agricultural Bank of China (ABC), the Bank of China (BOC) and the Construction Bank of China (CBC), have operated their own nationwide electronic intrabank funds transfer systems. More than two-thirds of all non-local payment volume are cleared through these intrabank clearing systems.

The basic framework for all the electronic intrabank clearing systems is the same, although the exact procedures, network structure and the technical platform may vary from one system to another. They are all electronic versions of the original paper-based non-local intrabank funds transfer systems described in section 2.3. In these new systems, the physical exchange of paper-based instruments is replaced with a data communication network. The procedures for clearing and settlement procedures remain fundamentally unchanged. All the commercial bank branches hold a clearing account with their local PBC office since the commercial bank’s intrabank clearing system cannot settle the intrabank payment transactions.

2.5.1 Functioning rules

Like the paper-based systems, the new electronic clearing systems have a multi-tiered structure. In general, there are a national center, tens of provincial centers and hundreds of city centers and/or thousands of county centers. A bank branch has to have separate accounts for processing centers of each level. Bank branches accept paper-based payment instruments, but truncation must be performed before the electronic payment order can be sent to various processing centers through the network.

2.5.2 Participation in the systems

All the branches of the same bank are eligible to participate in the system as long as they are connected electronically to the system. The BOC’s network also provides payment services for other institutions.

2.5.3 Types of transactions handled

Both credit and debit items are handled by these systems.

2.5.4 Transaction processing environment

All the electronic intrabank clearing systems have a tree-structured network which is based on either public X.25 network or dedicated (or leased) lines. By the end of 1996, ICBC’s network had connected more than 5000 of its branches, and ABC’s more than 20,000.

2.5.5 Operation of the transfer system

Most intrabank systems operate on a net basis, with batch processing. However, the ICBC’s system provides real-time payment transaction processing as well as batch processing. In general, batch processing is done at end of day or during the night. The net balance is transferred to each branch early in the following morning before the business day begins.

All these systems are used for collection of financial information to facilitate the bank’s management as well as for payment transaction processing.

2.5.6 Settlement procedures

(See Section 2.6 for details).

2.5.7 Credit and liquidity risk

Liquidity risk can arise in these intrabank clearing systems. Each participant is required to exercise self-restraint, and be aware of the risks exposed.

2.5.8 Pricing

No information concerning pricing is available.

2.5.9 Main projects and policies being implemented

All these systems are expected to expand to connect as many branches within a bank as possible.

The PBC is seeking to supervise all the intrabank clearing systems to some extent.

2.6 Settlement procedures

Settlement of payment transactions is made by the transfer of commercial bank branches’ clearing account balances at or between PBC branches. Therefore, each inter/intrabank payment system is actually an inter-branch payment system. The PBC-operated payment systems (LCHs, EIS and paper-based non-local system) process and settle the payment transaction between bank branches, both for branches of same bank or different banks. The intrabank fund transfer systems run by individual commercial banks clear payment transactions between branches of the same bank, but use PBC’s system(s) for settling the interbranch obligations.

The settlement procedures for each inter/intrabank system are summarized as follows:

LCHs: Settlement of both the morning and afternoon exchanges normally takes place on a same day basis (typically 12 noon for the morning clearing), after which time banks generally made the credit available to their customers. Return items are normally physically exchanged between banks at the next clearing session. Net totals for each clearing branch are given to PBC representatives at the clearing house for posting to the branch’s clearing account with the PBC on a same day basis.

EIS: The Outward Remitting Bank’s account is debited before the payment is routed. The Inward Remitting bank’s account is credited soon after the Inclearing PBC branch has received the payment information from the National Clearing Center. Single orders or batches for which there is insufficient cover remain in a queue until the receipt of cover. Only credit transfers are executed through EIS and are final as soon as the funds have been credited to the beneficiary’s account.

PBC’s paper-based non-local system: Interbank payment settlement is effected based on the periodic transfer of net settlement balances between branches of each bank through clearing accounts held at the PBC branches. Settlement by branches for net money owed to others is achieved by debiting their accounts. Branches that are owed money are passive settlement participants, receiving funds only when sent by their higher level offices based upon the daily settlement report (or when they request such funds to sent).

Intrabank fund transfer systems operated by individual commercial banks. Every day (or for some banks, every five days), each branch is required to report its net position to its next highest level head office (for example, county to provincial; provincial to national). Branches do not, however, settle each day. Settlement generally is done only when a prescribed value threshold has been exceeded. If a branch has a net obligation exceeding the prescribed threshold for any type of payment (county, provincial, national), for example RMB10 million for county level branches and RMB30 million for larger branches, the branch will transfer the excess funds associated with that payment type, through its local PBC to its appropriate level head office. Such transfers are generally made by telegraph between the appropriate PBC branch holding the account for the appropriate level head office, in turn, to transfer money to branches in any debit (money owed to) position for that type of payment.

3. Securities Settlement Systems

There is no unified securities settlement system for Chinese securities markets. Stock and bond transactions on the Shanghai Securities Exchange (SSE) are settled in Shanghai Securities Central Clearing and Registration Corporation (SSCCRC), those on Shenzhen Securities Exchange (SZSE) are settled in Shenzhen Securities Clearing Corporation, LTD (SSCC). PBC open market operations and over the counter transactions in government bonds among financial institutions and financial bonds due to government policy are settled in the China Government Securities Depository Trust & Clearing Corporation, LTD (CGSDTC).

At this time there is no uniform act governing securities settlement; the settlement of securities transactions is based on service provisions formulated by SSCCRC, SSCC and CGSDTC. A uniform "Securities Act" which would cover securities activities is being developed.

3.1 The SSCCRC settlement system

3.1.1 Major regulations

At present settlement of securities transactions is undertaken complying with the relevant service provisions.

3.1.2 Participation in the system

Settlement members of the SSCCRC consist of all the members of the SSE, the registration companies and securities trading centers all over the country. The funds settlement system consists of 68 settlement centers and 8 settlement representative banks. The settlement centers are the registration companies or the trading centers in the central cities, and the settlement representative banks are commercial banks.

3.1.3 Types of transactions handled

The system settles spot transactions of stocks, government bonds and funds, as well as repurchase agreements on the SSE. The total value of transactions in 1995 was RMB550 billion, including RMB76.4 billion government bonds and in 1996 RMB2760 billion, including RMB479.2 billion government bonds.

3.1.4 Operation of the transaction system

Book entries for securities occur on the customers’ securities accounts which are set up in the shareholders’ registration system in the SSCCRC. Funds settlement is via the fund settlement system described in section 3.1.2.

3.1.5 Transaction processing environment

Every investor sets up a securities account in the shareholders’ registration system. The securities are centrally managed and transferred on a gross basis.

Funds settlement is executed on day T+1 on a net basis via the fund settlement system. It is referred to as a three-class settlement system described in detail in 3.1.6.

Every investor opens a cash account at his intermediary’s firm.

Every intermediary opens a cash account and deposits sufficient settlement funds at the local settlement centre and in a local operating section of the representative bank. The intermediary also sets up a caution account at the local settlement center and a deposit guarantee fund.

The settlement member opens a fund account in one of the representative banks, and the local settlement center does the same in the bank’s local operating section. They also set up their respective caution account and deposit guarantee funds in the SSCCRC.

B-shares are transferred on day T+3, and the funds transfer is processed on a gross basis for foreign intermediaries and agent banks. Transaction instructions are input via computer terminals, which are matched automatically in the system. Every day there are two transaction chains: from 9:30 a.m. to 12:00 a.m., and from 1:30 p.m. to 3:00 p.m.

3.1.6 Settlement procedures

At the end of each trading day, the delivery of securities is executed on the investor’s securities account, according to the transaction records held in the system of the SSE.

Because there is no unified payment system in China presently, a three-class settlement system is used for funds settlement.

The SSCCRC clears the net cash position (debit or credit) for each settlement member, and makes available to the representative banks the transfer instructions and a statement of the intermediaries’ detailed transaction records, and sends the local settlement centers the settlement data.

On the basis of the transfer instructions transmitted from the SSCCRC, the representative banks make funds transfers through EIS, and inform every settlement member of the result.

The local settlement center checks the settlement data transmitted from the SSCCRC with the transfer statements from the representative banks, and makes fund transfers on the intermediaries’ accounts on a net basis via the local operating departments of the representative banks or its own settlement department, and informs the relevant intermediaries of the result.

The intermediaries check the settlement data with the transfer statements, and make the final cash transfers for every investor.

The above settlement procedure is completed on day T+1.

3.1.7 DVP arrangements

Because there is not a national unified payment system, the electronic connection between the delivery of securities and fund transfer remains inefficient, thus it is difficult to realize the true DVP arrangements. However, if securities are not available on the payee’s securities account, the SSCCRC informs the payee to cover the position within three days. If funds are not available on the payer’s cash account, the position is covered with the payer’s guarantee money deposited in the SSCCRC.

3.1.8 Credit and liquidity risk control measures

If securities are not available on the payee’s account, fund transfers remain provisional until the shortage of securities is covered. The deficient securities will be purchased at the market price with the blocked funds unless it is covered within three days. The arrears are paid by the seller consequently.

If funds are not available on the payer’s account, the position is covered with guarantee money held in the SSCCRC. The payer is expected to cover the position by T+1 and to pay the interest on the imprest. From day T+2 on, the payer is charged 0.5% of the imprest and the corresponding interest.

3.1.9 Pricing

The SSCCRC charges 0.1 per cent of the face value of the stocks as transfer fees. In addition, the SSE charges 0.012 per cent of the turn value as commission fees (0.01 per cent for government bonds).

3.2 The SSCC settlement system

3.2.1 Major regulations

Settlement of securities transactions is undertaken complying with the relevant service provisions.

3.2.2 Participation in the system

There are about 1000 settlement of members of the SSCC, including all the members on the SZSE and the special seats for government bonds. Fund transfers for the local intermediaries are settled via the local representative settlement institutions and the local branch of the PBC.

3.2.3 Types of transactions handled

The system settles spot transactions in stocks, government bonds and funds, as well as repurchase agreements on the SZSE. The total value of transactions in 1995 was RMB894.4 billion, including RMB773.2 billion government bonds and in 1996 it was RMB1394.9 billion, including RMB63.6 billion government bonds.

3.2.4 Operation of the transfer system

Securities held are centrally in the SSCC. Delivery of securities is executed at the end of each trading day. The investor’s account card can be used all over the country.

Guarantee money and settlement position must be available prior to fund transfers. The following three settlement patterns are in use:

centrally processed in Shenzhen, used by about 90 per cent of the settlement members;

settled within the local representative settlement institutions; and

settled at the trading centers on a gross basis.

3.2.5 Transaction processing environment

Every intermediary opens a securities account and a cash account in the SSCC. The securities are centrally held.

Funds are settled on a net basis on day T+1. Before entering the market, the intermediary should deposit RMB250,000 to the SSCC as guarantee money and RMB250,000 as settlement position. Guarantee money must be adjusted monthly on the basis of turnover of the previous month.

The local intermediary must open a cash account both at the local branch and the Shenzhen branch of the PBC or maintain a settlement position in the local representative settlement institution if his transaction is processed locally.

Transaction instructions are input via computer terminals, which are matched automatically in the system. Every day there are two transaction chains: from 9:30 a.m. to 12:00 a.m., and from 1:30 p.m. to 3:00 p.m.

3.2.6 Settlement procedures

At the end of each trading day, the delivery of securities is centrally executed on the corresponding securities account. The SSCC clears the resulting net cash position for each intermediary, to which the settlement data is transmitted through the communication network of the SZSE from 8:30 a.m. to 9:20 a.m. on day T+1.

Native intermediaries and the local intermediaries with an agency in Shenzhen, who are at a net debit position, must hand in a cheque to the SSCC before 10:00 a.m. on day T+1.

Local intermediaries must make remittances at the local branch of the PBC through EIS to cover their positions before 10:00 a.m. on T+1 and fax the returned telegraphic money order to the SSCC. This local settlement pattern is similar to the so-called three-class settlement system of the SSCCRC.

3.2.7 DVP arrangements

The nature of the payment system limits the ability to realize the DVP.

3.2.8 Credit and liquidity risk control measures

Cash positions of institutions which have oversold are frozen. Penalty interest rates are imposed on those who have overbought and securities are frozen.

3.2.9 Pricing

The SSCC charges 0.1 per cent of the face value of the transferred stocks as transfer fees. In addition, the SZSE charges 0.01925 per cent of the turn value as commission fees (0.036 per cent for funds and 0.01 per cent for government bonds).

3.3 The NET corporate share settlement system

3.3.1 Major regulations

The Service Regulations, the Securities Mandate, Settlement Rules and Settlement Provisions form the basis of securities settlement for the NET system.

3.3.2 Participation in the system

There are about 60 intermediaries participating in the system, including major security companies, investment corporates and other financial institutions in 17 provinces all over the country. The investor is required to be an institutional legal person.

3.3.3 Types of transactions handled

The NET system offers electronic quotation, matching, settlement and information services for the off-exchange trading of the corporate shares. At present there are 7 stocks conducted on the market, which are issued to and circulated among institutional legal persons.

3.3.4 Operation of the transfer system

The NET system is a computer network connected with the satellite communicational network, which is operated by the Chinese Securities Trading System Corporation.

3.3.5 Transaction processing environment

Fund transfers are conducted on a net basis on day T+1. A intermediary participating in the system sets up a securities account and a funds settlement account and must deposit guarantee money and a settlement position in advance.

The transaction instructions are input via computer terminals, which are matched automatically in the system. Everyday there are two transaction chains: from 9:30 a.m. to 12:00 a.m., and from 1:30 p.m. to 3:00 p.m.

3.3.6 Settlement procedures

The delivery of securities and funds settlement are processed on a two-class basis.

At the end of each trading day, the delivery of securities is executed automatically. The intermediary’s cash account is correspondingly debited. The settlement data is communicated to every intermediary via the NET network.

The computer system of the intermediary accordingly generates the settlement list for every investor on the basis of his transactions made during the day.

3.3.7 Credit and liquidity risk control measures

Overselling is prohibited. If funds are not available on the payer’s account, the position is covered by the guarantee money. The payer is charged 0.5 per cent of the imprest daily. Warnings are given and serious violations may result in exclusion from the system.

3.3.8 Pricing

The CSTSC charges 0.1 per cent of the turnover value as commission fees from the payer and payee, of which 70 per cent is transaction commission charges and 30 per cent is transfer fees.

3.4 The CGSDTC system for settlement of PBC open market operations

3.4.1 Major regulations

The Government Mandate and Administration Rule, the Government Settlement Provisional Rule, to be enacted by the Ministry of Finance, are the basic regulations.

3.4.2 Participation in the system

Participants in the system are the open market operation division of PBC and 18 commercial banks. The system also connects with the SSCCRC and the SSCC.

3.4.3 Functionalities

Besides registration and mandate, the system also processes bond issues, invitations for bids and tender bidding for spot and repurchase agreements and pledging, and the delivery of securities.

3.4.4 Operation of the system

The securities settlement system is a computer network connected by telephone line, in which each customer must open a securities account and a cash account.

3.4.5 Transaction processing environment

Delivery may be either free of payment or versus payment. Matched transaction instructions are processed on a gross basis on the designated date. The settlement member has to hold a settlement position if DVP is taken. It is planned to realize the true DVP via bank fund transfers.

3.4.6 Settlement procedures

At the beginning of the settlement day, securities are transferred provisionally. At the end of the settlement day, this transfer is final if the corresponding fund transfer is executed or confirmed by the bank.

3.4.7 DVP arrangements

If securities are not available, the corresponding funds are not transferred. If cash position is not available, the corresponding securities are not delivered.

3.4.8 Credit and liquidity risk control measures

The funds payment and delivery of securities are processed on the same day. The delivery of securities is final if the fund transfer is executed.

3.4.9 The planned government securities book entry system

A government securities registration, transfer and settlement system is being planned and will be connected with CNAPS (see Section 5.1) and international settlement systems. It will adopt unified international securities codes.

Participants in the system will include the open market operation participants, mandatory representative institutions, settlement departments of the exchanges, government securities settlement institutions and other financial institutions.

The system will perform the following functions:

paperless securities issuance, including tender bidding;

securities registration and mandate;

matching of transaction instructions;

realizing real time settlement by connecting with the national payment system;

securities quotation;

payment of securities interest and principal;

settlement for financial futures;

pledging and repurchase agreements; and

information services.

4. The Role of the Central Bank

4.1 General Responsibilities

4.1.1 Statutory responsibility

The central bank law requires the PBC to supervise, regulate and give instructions on banking activities. Under the Law of the People’s Bank of China, the PBC is required to regulate the amount of money in circulation and to maintain the smooth operation of payment, clearing and settlement system.

To meet the demand for currency, the PBC is vested with the sole right of currency issue, and is responsible for producing, supplying and regularly renewing banknotes, replacing damaged notes, calling in notes and checking the currency in circulation for counterfeits. The PBC operates its own note-printing and mint works.

The PBC fulfills its statutory obligation to maintain the smooth operation of the payment, clearing and settlement system, apart from a more general oversight function, by providing the various banking institutions with its transfer network, namely, more than 2000 LCHs, the paper-based non-local funds transfer system and the EIS. These payment systems have a neutral impact on competition. The PBC also exerts a limited influence on the bank’s terms for provision of payment services through its own terms of business, handling procedures, debiting and crediting terms and pricing policy.

In addition to the clearing and settlement function it performs for the banking industry, the PBC acts as banker to the Central Government, being the only bank which manages the Treasury’s account for handling the public revenue.

4.1.2 Establishment of common rules

The PBC cooperates closely with the Chinese banking industry in order to coordinate organizational and technical procedures for payment transactions. It chairs the committee of the National Financial Standards which is active in setting the technical standards for banking and has played a major role in the formulation of regulations and agreements governing the existing interbank funds transfer systems and LCHs. However, the PBC has little influence on banks’ intrabank funds transfer systems although these systems are, in many respects, similar to the interbank funds transfer system in western countries.

4.1.3 Supervision and audit

The banking acts form the legal basis for banking supervision. The purpose is to safeguard the viability of the banking industry and to protect the depositors by monitoring the credit worthiness and liquidity of the banks. In addition, the PBC has a special role in the process of Chinese financial reform.

The PBC has responsibility for banking supervision. It undertakes surveillance of the banks through analysis of the banks’ regular reports and on-site supervision.

Closely related to banking supervision is the surveillance of the payment systems, which is performed by PBC and derives from its responsibility to maintain the smooth operation of payment, clearing and settlement systems. The PBC has an ongoing program to develop its own systems and cooperates with other institutions to make their systems more efficient and reliable.

The PBC is improving its ability to monitor closely the banks’ intra-day positions in the payment system.

4.2 Provision of processing and settlement facilities

4.2.1 Provision of processing facilities

The PBC executes payments and provide all banks with payment facilities for settling large-value and retail payments. More than 2000 LCHs are operated by PBC to clear and settle all local interbank payments and most intrabank payments. The paper-based non-local interbank payments used to be cleared and settled first between banks through LCHs, though PBC regulations provide for the non-local intrabank high-value payments as well as the non-local interbank payments to be cleared and settled through EIS.

4.2.2 Provision of settlement accounts

PBC branches maintain accounts for bank branches and some public authorities and, to a limited extent, for limited enterprises. Details of these accounts are set out in Section 2.1.2.

The PBC does not permit overnight overdrafts. Because most transactions are processed in batch mode and settled at the end of the day, the concept of intraday overdrafts does not really apply except for EIS, where funds must be available in the sending branch’s clearing account before release of the payment.

In addition to the settlement of payments routed via the PBC’s payment systems, the accounts are also used for the settlement of banks’ positions resulting from clearing procedures outside the PBC, for example, the intrabank fund transfer systems operated by major banks.

4.2.3 Provision of credit facilities

In order to smooth the settlement process, banks can borrow funds from the local PBC office provided that the borrowing bank has sufficient authorization in its loan account with the PBC. Before turning to the PBC for funds, a settling bank must seek to borrow funds from:

its next highest level branch of the same commercial bank; or

another branch of the same bank in the same country/city; or

a branch of a different bank in the same county/city.

4.2.4 Pricing policies

Currently, the capital cost of setting up clearing centers and acquiring computers and related electronic equipment used in the payments system are financed by appropriation from the Ministry of Finance, Head Office of the PBC and internally generated funds. The running costs of the system are treated as regular expenses of the PBC which are not recovered from the commercial banks. The participating branches in a local clearing area are charged a nominal fee to cover some of the costs of operating the clearing center.

The reasons for not charging the true operating cost of the clearing and settlement systems stem basically from a PBC policy decision. It is expected that, with the implementation of the CNAPS project (see section 5.1), the issue of charging will be re-addressed.

4.3 Monetary policy and payment systems

The conduct of monetary policy in China shares some characteristics with the industrial countries of the west, but also has many differences. The principal differences are:

The Chinese economy is in the transition period from a centrally-planned economy into a market-oriented one. The Chinese Government still has significant authority to directly control economic functions in order to promote an orderly transition.

Chinese financial markets are developing rapidly, but they are quite undeveloped as compared to the west. The absence of a high volume, liquid financial market makes it virtually impossible to influence monetary aggregates only through open market operations.

Because of these differences, the set of instruments used to influence monetary policy differ in many respects from the west.

4.3.1 The current main monetary instruments

Allocation of credit: The PBC has great power to influence the allocation of credit geographically and by industrial sector via its authority over the state-owned commercial banks.

Issuance of currency: The PBC’s authority to issue currency allows it to influence the financial resources and activities of the commercial banks.

Required reserve ratio: The PBC has authority to alter the required reserve ratio but it has been set at 13 per cent of deposits since 1988.

Establishment of interest rates: The PBC has the authority to establish the official rate of interest that commercial banks pay on deposits and charge for loans.

Open market operations: The value of Treasury Bills on issue is not large enough nor is the market liquid enough to permit open market operations to be very effective at this time. It is expected, however, that such activities will play a significantly greater role in the near future.

4.3.2 Open market operation and payment system

Although open market operations have not become a very effective means to implement the PBC’s monetary policy, the Chinese financial market, as noted in Part I, is developing rapidly, and the PBC undertakes open market operations to conduct its monetary policy.

An interbank money market has been in operation since 1993, in which the PBC indirectly influences the market rate of interest through its policies on lending, rediscount, special deposits and control of assets and liabilities. At this time, there are seven types of interbank loan, with a maturities of 1, 7, 20, 30, 60, 90, 120 days, respectively.

A foreign exchange trading center has been open since 1994, in which the PBC buys/sells US$, US$ and JPY.

A government securities market has been operating since April 1996, in which the PBC buys/sells the securities through REPOS with the banks every Tuesday. Cash settlement is done on the following day, i.e. every Wednesday, through EIS.

5. Major projects and policies to be implemented

5.1 China’s National Advanced Payment System (CNAPS)

China’s National Advanced Payment System, or CNAPS, has been a major project to modernize the China’s payment systems since early 1990s. The design of CNAPS is heavily influenced by the current Chinese realities and demands as well as the long term forecasts and experiences of other developed countries. The main components of the CNAPS project include:

To set up the technical infrastructure for China’s modern payment system, namely, a nation-wide data communication network which connects various banking institutions to the national and regional processing centers. This supporting technical infrastructure is called China National Financial Network (CNFN); and

to develop payment processing systems, namely, CNAPS, including RTGS-based High Value Payment System (HVPS), Bulk Electronic Payment System (BEPS) for processing payment transactions of low value, bank card authorization system and a book-entry system for settlement of Government Securities. In addition, the Local Clearing Houses will continue to exist as they are now. However, more attention will paid to the LCH’s automation.

The large value funds transfer system of the CNAPS is the core of payment application systems. Given its importance, this system will be owned and operated by the PBC. It will be a RTGS-based system, providing same-day settlement for the payment transactions in interbank funds transfers, financial markets, securities markets, foreign exchange, etc. It will also provide the net settlement for BEPS, LCHs, Bank Card Payment, and intrabank funds transfer systems operated by major commercial banks.

Because the large-value payment system is to connect the regional economy and local financial centers into an integrated national market, this system will not distinguish national payments from local ones, and interbank payments from intrabank payments. The national processing center of HVPS will handle all large-value payment transactions between all the direct participants who hold a settlement account with the PBC.

Given the high level of required reserves and the absence of a mature intra-day money market, the PBC will provide limited intraday credit for the participants in the system, but no overnight overdrafts will be allowed. The PBC will charge for the intraday credit in order to make participants manage the payment risks effectively and minimize overdrafts.

5.2 Consolidation and centralization of PBC accounts

Until now, the PBC has mainly used required reserves that commercial banks hold in their accounts at PBC branches to conduct monetary policy. The PBC account structure and the reserves management are closely related to the smooth functioning of the country’s payment systems. As noted previously, every local branch of commercial banks is required to hold three accounts with their local PBC branch. This highly decentralized account structure has several negative implications: segregating the nation’s banking system, making banking supervision more difficult, and impeding an efficient cash management by commercial banks themselves. With respect to payment system, the highly decentralized PBC account structure, in a sense, prevents an integrated payment system from being implemented, especially harmful to an integrated RTGS-based High Value Payment System. The PBC has sought to reform central bank settlement practices, bringing settlement methods more closely in line with the international community. Therefore, a change in this area is absolutely necessary, and the key to the success of CNAPS project.

In the CNAPS, the consolidation and centralization of the accounts implies:

within a local area, namely a city or a county, all branches of a same commercial bank will hold only one consolidated account, instead of many, for settlement of payment transactions and required reserves management; and

all the PBC accounts will be physically centralized in the National Processing Center (NPC) and be managed by a software package called SAPS (Settlement Account Processing Systems), while PBC branches will remain responsible for opening and closing an account, setting overdraft limits and managing required reserves. This arrangement will provide the prerequisite for the development of the new payment system.

Such consolidation and centralization will simplify clearing and settlement of non-local payments and will facilitate the settlement of LCHs net balances and intrabank fund transfer transactions. This feature distinguishes CNAPS from all other existing payment systems including EIS.

Source: EMEAP