A 2002 report by the Executive's Meeting of East Asia Pacific Central Banks and Monetary Authority (EMEAP) noted that the People's Bank of China (PBC) has been ameliorating different payment methods, perfecting relevant payment regulations and standardizing non-cash payment instruments. The PBC has also been actively promoting the development of electronic payments and standardizing local clearing houses, to support the developments of China's securities market and foreign exchange market. According to the PBC's 2005 Financial Stability Report, to ensure the security and stability of the payment system, the design of China's National Advanced Payment System (CNAPS) has taken into account the Bank for International Settlements' (BIS) Core Principles for Systemically Important Payments Systems (CPSIPS). In addition, CNAPS has introduced advanced payment and settlement methods and technologies that are universally recognized. The PBC claims that CNAPS has basically met the requirements for safety and efficiency of the CPSIPS, but notes that there is still room for improvement in some areas. Nevertheless, there is no information publicly available as to China's compliance with the CPSIPS.

General Overview

In a 2002 report issued by the Executive's Meeting of East Asia Pacific Central Banks and Monetary Authority (EMEAP), the authors maintain that, in order to meet objective requirements of China's economic and financial developments, the People's Bank of China (PBC) has been ameliorating different payment methods, perfecting relevant payment regulations and standardizing non-cash payment instruments among which bills are a principal part. The PBC has also been actively promoting the development of electronic payments and standardizing local clearing houses, to support the developments of China's securities market and FX market. According to the PBC's 2005 Financial Stability Report, to ensure the security and stability of the payment system, the China's National Advanced Payment System (CNAPS) has taken into full consideration the requirements of the Core Principles for Systemically Important Payments Systems of the Bank for International Settlements (BIS) with regards to its design and has introduced advanced payment and settlement methods and technologies that are universally recognized. The PBC claims that CNAPS has basically met the requirements for safety and efficiency of the Core Principles, but notes that there is still room for improvement in some areas. (EMEAP 2002, p. 64; PBC 2005, pp. 121, 126) However, there is no information publicly available as to China's compliance with the Core Principles for Systemically Important Payment Systems.

The staff conducting the International Monetary Fund's 2006 Article IV Consultations with China emphasized the benefits of early participation in a Financial Sector Assessment Program (FSAP), which would help take stock of the recent significant progress in financial sector reforms and identify priorities for further reforms. While the decision to participate was formally reached in 2005, the authorities are still deciding on the appropriate time to launch the process. (IMF 2006, p. 25)

The PBC is the owner and operator of China's core payment system - CNAPS. Policy banks, state-owned commercial banks (SOCBs), joint-stock commercial banks (JSCBs), city commercial banks, urban credit cooperatives (UCCs) and rural credit cooperatives (RCCs), foreign banks and other financial institutions in the banking sector provide payment and settlement service to clients directly, and they constitute the core of the payment service organizations. (PBC 2005, p. 119)

As of 2005, China's payment system has put in place a pattern in which the CNAPS is the core; the intra-commercial bank clearing system is the basis, accompanied by the intra-city clearing house and clearing system, foreign currency clearing system and the bank card payment system. (PBC 2005, p. 120)

The Law on the People's Bank of China, promulgated in 1995 stipulates that the PBC's responsibilities in payment systems are to "maintain the smooth operation of payment and settlement systems." According to the law, the PBC is responsible for formulating regulations related to payment clearing and settlement, as well as for providing interbank settlement services. The Law of the People's Republic of China on Commercial Banks, issued in the same year, requires commercial banks to provide payment and settlement services for their customers on a timely basis, and to be subject to supervision and regulation from the PBC. (The Law on the People's Bank of China was revised in 2003 and bestows the responsibility of maintaining financial stability directly on the PBC. (EMEAP 2002, p. 64; PBC 2005, p. 130)

CNAPS is the public payment platform provided by the PBC to the financial institutions and the money market and mainly includes processing centers at two levels and a backbone network of the payment system. The processing centers at two levels are respectively the national processing center (NPC) and the 32 prefecture city-level clearing and processing centers (CCPCs) situated in 31 provincial capitals (or municipalities directly under the central government) and Shenzhen City. (PBC 2005, p. 120)

The CNAPS is a major core system with two sub-systems: the Real-time Gross Settlement (RTGS) system and the Deferred Net Settlement (DNS) system. The RTGS system is a large-value payment system (LVPS) that mainly provides efficient and convenient service to large-value and emergency low-value credit transactions. The DNS system is a retail system, mainly providing low-cost, bulk-volume service to interbank paper certificate retained debit and small-value credit transactions. The two systems are independent from each other in logic, but enjoy full sharing of physical resources. (PBC 2005, p. 120)

The intra-city clearing house and clearing system are supplements to CNAPS at regional levels. The former deals with the exchange and clearance of paper bills, while the latter deals with the exchange and clearance of electronic information. Regarding the foreign currency clearing system, seven regions in China have established foreign currency clearing centers handling interbank foreign currency clearing business. (PBC 2005, p. 122)

According to an Oxford Analytica (OA) 2006 report, the PBC has 1,000 clearing centers covering over 600 cities and towns. The four state banks have their own internal clearing systems that allow intra-city remittances of 500,000 Rmb (64,000 US dollars) or less. (OA 2006, p. 62)

The authors of the 2002 MoF Japan report maintain that CNAPS has several advantages over the previous Electronic Interbank System (EIS). With CNAPS, financial institutions' deposit accounts with PBC are collectively managed by the host center. Intra-day overdrafts and automatic repo facilities are also provided, and liquidity risk management is improved. For small-amount payments, particularly between distant places, CNAPS is more efficient than EIS in which payment is performed on a gross basis. Finally, by CNAPS connecting of the government bond entry and payment system at Central government bonds depository and clearing corporations limited (CDC) to the payment system, Delivery vs. Payment (DvP) payment of government bonds may become possible. (MoF Japan 2004, p. 27)

In its 2005 report, the PCB has noted problems with the payment system in several areas with regard to CNAPS: (1) the legality of payment made by a market participant in bankruptcy circumstances is yet to be legally confirmed; (2) processing centers at the two levels have to develop the disaster backup system as early as possible; (3) with CNAPS becoming more popular, it is imperative to take effective measures to raise business handling capacity; and (4) as the risk control ability of some of the small- and medium-sized financial institutions is still quite weak, the risk of payment clearance has increased consequently. (PBC 2005, p. 127)

With regard to intra-city clearing house and clearing system, they also have a problem with the final legal confirmation of the payment made. With regard to foreign currency clearing system, the system is yet to be unified and is separated from the corresponding RMB system in terms of management and operation, which has resulted in low efficiency of interbank foreign currency clearance in the domestic market. It is also harmful to the PBC's monitoring of capital in foreign currency and makes it difficult to fulfill the development and management requirements in view of economic and financial globalization and China's target of gradual liberalization of capital control. (PBC 2005, p. 127)

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

II

There is no information publicly available as to China's compliance with this Principle.

The Law on the People's Bank of China (PBC), promulgated in year 1995, stipulates that the PBC's responsibilities in payment systems are to "maintain the smooth operation of payment and settlement systems." According to the law, the PBC is responsible for formulating regulations related to payment clearing and settlement, as well as for providing interbank settlement services. The Law of the People's Republic of China on Commercial Banks, issued in the same year, requires commercial banks to provide payment and settlement services for their customers on a timely basis, and to be subject to supervision and regulation from the PBC. (EMEAP 2002, p. 64) The Law on the People's Bank of China was revised in 2003 and bestows the responsibility of maintaining financial stability directly on the PBC. (PBC 2005, p. 130)

The PBC states in its 2005 Financial Stability Report that it has improved payment and settlement rules and regulations, providing legal guarantee to supervise the payment system. China has put in place a fairly sound system of payment rules and regulations, with the Negotiable Instruments Law, Rules on Bill Management, Payment and Settlement Rules, and Administrative Rules for RMB Bank Settlement Accounts as the main body and supplemented by other relevant regulations or bylaws. In particular, with regards to payment instruments, a systematic legal institution has been shaped that not only covers laws and regulations related to paper-based payment instruments, but also includes those related to card-based payment instruments like the Regulations on Bank Card Business Management and the Regulations on Bank Card. (PBC 2005, p. 123)

The legal system for the prevention of systemic risks includes: the legal system preventing systemic financial risks established by the Law on the People's Bank of China; the legal system for financial supervision and regulation authorities to prevent risks established by the Law on Banking Regulation, the Securities Law, the Insurance Law, and the Company Law; and the legal system to ban illegal financial institutions and illegal financial activities established by the Rules on Banking Illegal Financial Institutions and Illegal Financial Activities promulgated by the State Council. (PBC 2005, p. 131)

The PBC also notes, however, that, with regard to the China's National Advanced Payment System (CNAPS), the legality of payment made by a market participant in bankruptcy circumstances is yet to be legally confirmed. Moreover, most of the existing laws deal with payment instruments and they are quite insufficient when it comes to the payment system and the payment service market. Internal conflicts still exist between some rules and regulations. (PBC 2005, p. 127)

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

II

There is no information publicly available as to China's compliance with this Principle.

In a 2002 report issued by the Executive's Meeting of East Asia Pacific Central Banks and Monetary Authority (EMEAP), the Bills Law of the People's Republic of China, promulgated in year 1995, regulates the issue, endorsement, acceptance, guaranty, payment and right of recourse concerning bill of exchange, promissory note and check. It also defines the rights, obligations and legal responsibilities of different parties involved in bill transactions. (EMEAP 2002, p. 64)

Set by the PBC, the Regulations on Trading in the Interbank Bonds Market define participants' qualification, types of transactions, custody and settlement for the interbank bonds market. The Temporary Provisions on Management of the Government Bonds Custody, laid down by the Ministry of Finance, aims at protecting the legal rights of investors and standardizing the custody behavior for government bonds. The Provisions on Management of the Customer's Trading Deposits, issued by the CSRC, intend to monitor commercial banks involving in management of customer's deposits and security registrars to provide real time fund transfers for securities trading. (EMEAP 2002, p. 64)

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

II

There is no information publicly available as to China's compliance with this Principle.

According to a 2002 report issued by the Executive's Meeting of East Asia Pacific Central Banks and Monetary Authority (EMEAP), one of the objectives of the People's Bank of China (PBC) in the design of the China National Advanced Payment System (CNAPS) is risk minimization. The system allows direct participants to check their expected positions in the book of the PBC as soon as possible. It also automatically reminds them of their balances, in order to enhance their liquidity management ability. The PBC also requires collateral on daylight overdraft of direct participants, and also has the rights to limit types of collateral. The PBC will monitor and assess each direct participant's creditworthiness and payment ability daily. The PBC may cancel a direct participant's daylight overdraft ceiling as necessary. If the PBC rates that borrowing frequency, or other factors of a direct participant are unsatisfactory, the PBC may also freeze his settlement account, stop debiting, or even close his account in line with relevant regulations. When providing high penalty interest loans at the end of each business day, the PBC may ask for effective collateral to reduce its credit risk. (EMEAP 2002, p. 77)

The PBC claims in its 2005 Financial Stability Report that CNAPS has established an improved risk control mechanism. To prevent liquidity risks, the payment system has adopted the Real-Time Gross Settlement (RTGS) and bulk net settlement for bulk payments, and for those insufficient account balance cases, they are held in a "No Settlement File Queue." To prevent clearing risks, the operating time of the clearing window is fixed. If a payment instruction remains in the queue after the window is closed, it will be returned to the sending bank, or liquidity supply may be obtained from the PBC with a high penalty. To prevent credit risks, a reasonable daytime overdraft limit is verified and approved for commercial banks, requiring the banks to provide effective guarantees for high penalty loans and the clearance account of a bank could be deprived of debit functions or even be closed. At the same time, since the system participants use their deposit account at the PBC to complete settlement, the reliability of the settled capital is guaranteed. CNAPS has realized Delivery-versus-Payment (DVP) settlement of the national interbank bond market and the central bank's open market operations. (PBC 2005, pp. 121-22)

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

II

There is no information publicly available as to China's compliance with this Principle.

The China National Advanced Payment System (CNAPS) is a major core system with two sub-systems: the Real-time Gross Settlement (RTGS) system and the Deferred Net Settlement (DNS) system. The RTGS system is a large-value payment system (LVPS) that mainly provides efficient and convenient service to large-value and emergency low-value credit transactions. The DNS system is a retail system, mainly providing low-cost, bulk-volume service to interbank paper certificate retained debit and small-value credit transactions. The two systems are independent from each other in logic, but enjoy full sharing of physical resources. At present, the RTGS system has been introduced and used in most places in China. Each transaction is completed real-time within one minute of entry. (PBC 2005, p. 120)

In a 2002 report issued by the Executive's Meeting of East Asia Pacific Central Banks and Monetary Authority (EMEAP), the authors expect that, before debiting settlement accounts of direct participants, the CNAPS will check their balance (or daylight overdraft ceiling) in the book of the PBC. Once the accounts are debited or credited, payments become final. Before 17:00 each business day, the CNAPS processes payment instructions according to direct participant's available balance (including daylight overdraft ceiling). If a participant is short of available balance, his instructions will be queued. Between 17:00 and 18:00, the system only accepts the instructions that cover debit position or settle payments in queues. At 18:00, the system will return high value instructions for those positions are still short of payment, and provide loans with high penalty interest to other payments in queues (such as net settlement). (EMEAP 2002, p. 77)

The PBC claims in its 2005 Financial Stability Report that CNAPS has established an improved risk control mechanism. To prevent liquidity risks, the payment system has adopted the Real-Time Gross Settlement (RTGS) and bulk net settlement for bulk payments, and for those insufficient account balance cases, they are held in a "No Settlement File Queue." To prevent clearing risks, the operating time of the clearing window is fixed. If a payment instruction remains in the queue after the window is closed, it will be returned to the sending bank, or liquidity supply may be obtained from the PBC with a high penalty. To prevent credit risks, a reasonable daytime overdraft limit is verified and approved for commercial banks, requiring the banks to provide effective guarantees for high penalty loans and the clearance account of a bank could be deprived of debit functions or even be closed. At the same time, since the system participants use their deposit account at the PBC to complete settlement, the reliability of the settled capital is guaranteed. CNAPS has realized Delivery-versus-Payment (DVP) settlement of the national interbank bond market and the central bank's open market operations. (PBC 2005, pp. 121-22)

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

II

There is no information publicly available as to China's compliance with this Principle.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

II

There is no information publicly available as to China's compliance with this Principle.

The Law on the People's Bank of China (PBC), promulgated in year 1995, stipulates that the PBC's responsibilities in payment systems are to "maintain the smooth operation of payment and settlement systems." According to the law, the PBC is responsible for formulating regulations related to payment clearing and settlement, as well as for providing interbank settlement services. The Law of the People's Republic of China on Commercial Banks, issued in the same year, requires commercial banks to provide payment and settlement services for their customers on a timely basis, and to be subject to supervision and regulation from the PBC. The Law on the People's Bank of China was revised in 2003 and bestows the responsibility of maintaining financial stability directly on the PBC. (EMEAP 2002, p. 64; PBC 2005, p. 130)

According to the PBC's 2005 Financial Stability Report, China's National Advanced Payment System (CNAPS) participants use their deposit account at the PBC to complete settlement, the reliability of the settled capital is guaranteed. CNAPS has realized Delivery-versus-Payment (DVP) settlement of the national interbank bond market and the central bank's open market operations. (PBC 2005, pp. 121-22)

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

II

There is no information publicly available as to China's compliance with this Principle.

According to the People's Bank of China 2005 Financial Stability Report, the China National Advanced Payment System (CNAPS) has given full consideration to security control problems in terms of hardware, software and management. Moreover, the PBC, as the operator and manager of CNAPS, will, in accordance with the Core Principles for Systemically Important Payment Systems, continue to improve the design, operation, maintenance and oversight mechanisms of the system and optimize business processing procedures to make the payment system safer and more efficient. The PBC will step up its efforts to build a disaster back-up system and improve it operational and maintenance mechanism. (PBC 2005, pp. 122, 129)

The PBC has strengthened the payment system oversight and management to fend off payment system risks. To ensure the security and stability of the large-value payment system (LVPS), the PBC improved the related legal institutions, promulgated the Business Rules of LVPS and strengthened regulations governing system operation management. It enhanced the accountability for the operation, maintenance and management of the payment system to prevent system risks. It also formulated pre-emptive plans dealing with potential payment system risks and a contingency plan in times of crisis together with a working mechanism dealing with risk settlement. It improved payment system operation status reporting and information feedback system to ensure that the problems in the system are spotted and identified at an early stage. (PBC 2005, p. 123)

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

II

There is no information publicly available as to China's compliance with this Principle.

According to the People's Bank of China (PBC) 2005 Financial Stability Report, the PBC, as the operator and manager of China National Advanced Payment System (CNAPS), will, in accordance with the Core Principles for Systemically Important Payment Systems, continue to improve the design, operation, maintenance and oversight mechanisms of the system and optimize business processing procedures to make the payment system safer and more efficient. (PBC 2005, p. 129)

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

II

There is no information publicly available as to China's compliance with this Principle.

The People's Bank of China (PBC) states in its 2005 Financial Stability Report that China National Advanced Payment System (CNAPS) has an open standard for access. All eligible small- and medium-sized financial institutions can become direct participants and get connected to the system to handle their payments. (PBC 2005, p. 122)

In a 2002 report issued by the Executive's Meeting of East Asia Pacific Central Banks and Monetary Authority (EMEAP), all institutions that open settlement accounts with People's Bank of China (PBC) branches may participate in the China National Advanced Payment System (CNAPS) directly. CNAPS direct participants include bank's branches in cities, credit unions, PBC accounting departments and treasury departments at city level. Moreover, some institutions (such as Central government bonds depository and clearing corporations limited (CDC)) approved by the PBC to engage in a given business, may become concessionary participants. (EMEAP 2002, p. 76)

The Bills Law of the People's Republic of China, promulgated in 1995, regulates the issue, endorsement, acceptance, guaranty, payment and right of recourse concerning bills of exchange, promissory notes and checks. It also defines the rights, obligations and legal responsibilities of different parties involved in bill transactions. (EMEAP 2002, p. 64)

Set by the PBC, the Regulations on Trading in the Interbank Bonds Market define participants' qualification, types of transactions, custody and settlement for the interbank bonds market. The Temporary Provisions on Management of the Government Bonds Custody, laid down by the Ministry of Finance (MoF), aims at protecting the legal rights of investors and standardizing the custody behavior for government bonds. The Provisions on Management of the Customer's Trading Deposits, issued by the China Securities Regulatory Commission (CSRC), intends to monitor commercial banks involving in management of customer's deposits and security registrars to provide real time fund transfers for securities trading. (EMEAP 2002, p. 64)

X. The system's governance arrangements should be effective, accountable and transparent.

II

There is no information publicly available as to China's compliance with this Principle.

In a 2005 report issued by Oxford Analytica, the authors state that the People's Bank of China (PBC) Law requires the PBC to submit work reports concerning monetary policies and financial supervision and control to the Standing Committee of the National People's Congress (NPC). In addition, summary versions of these reports are available to the general public. (OA 2005, p. 63)

In the past, the NPC was regarded as a rubber stamp of the government. In recent years, it has become more vocal on certain economic issues, although it remains subservient to the Communist Party when it comes to major government decisions. Officials of the PBC are answerable to the State Council and the NPC when called upon to appear, normally on a quarterly basis. (OA 2005, p. 63)

The PBC remarks in its 2005 Financial Stability Report that oversight responsibilities have yet to be clarified and coordination between different government agencies needs to be strengthened. (PBC 2005, p. 127)

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

II

There is no information publicly available as to China's compliance with this Principle.

The People's Bank of China (PBC) states in its 2005 Financial Stability Report that the Law on the PBC establishes the legal status of the PBC as the organizer, manager and supervisor of the payment systems and bestows on it the responsibility of maintaining the normal operation of the payment, clearing and settlement systems. The PBC, through improving laws and regulations, improving policy environment, encouraging payment business innovation, regulating market order and enhancing the capability to manage risks, guides and fosters the development of the payment and settlement system, promotes orderly competition, reduces risk and safeguards financial stability. (PBC 2005, p. 119)

The People's Bank of China (PBC) is the sole owner and operator of the China National Advanced Payment System (CNAPS) due to its systemic importance. Based on the law, the PBC can provide services such as cash payments, accounts administration, and clearing and settlement services by organizing and operating interbank payment systems and local clearing houses. (EMEAP 2002, pp. 76, 67)

B. The central bank should ensure that the systems it operates comply with the Core Principles.

II

There is no information publicly available as to China's compliance with this Principle.

According to the People's Bank of China (PBC) 2005 Financial Stability Report, the PBC, as the operator and manager of CNAPS, will, in accordance with the Core Principles for Systemically Important Payment Systems, continue to improve the design, operation, maintenance and oversight mechanisms of the system and optimize business processing procedures to make the payment system safer and more efficient. (PBC 2005, p. 129)

The PBC has taken an active part in self-evaluating the payment system under the auspices of the cross-ministry "FSAP," a self-evaluation leading group. It has studied and formulated the payment clearing organization management system, putting forth requirements on clearing organization's market access and withdrawal, business management and control risk. It has strengthened the oversight and management of the central bank inter-branch accounting service and established a standardized inter-branch accounting examination system. (PBC 2005, pp. 124-25)

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

II

There is no information publicly available as to China's compliance with this Principle.

According to the People's Bank of China (PBC) 2005 Financial Stability Report, the PBC, as the operator and manager of CNAPS, will, in accordance with the Core Principles for Systemically Important Payment Systems, continue to improve the design, operation, maintenance and oversight mechanisms of the system and optimize business processing procedures to make the payment system safer and more efficient. (PBC 2005, p. 129)

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

II

There is no information publicly available as to China's compliance with this Principle.