The currency of the People’s Republic of China is known as the renminbi (RMB), and its main unit of account is the yuan (¥ or CNY).1)Retrieved 1 September 2015 http://www.cmegroup.com/education/files/offshore-chinese-renminbi-market.pdf
The relationship between the terms renminbi and yuan is akin to that of the sterling and the pound in the UK. Renminbi translates to “people’s currency,” and the literal meaning of yuan is “round.”
The yuan is the sole currency of the People’s Republic of China, and it is increasingly used as a tool for international trade settlement and financial transactions. The Chinese yuan is the ninth most traded currency overall and is the second most used currency in global trade finance. Fifty countries use the yuan to settle at least 10% of their trade with China.2)Retrieved 1 September 2015 http://www.scmp.com/business/money/money-news/article/1649148/swift-says-15-countries-now-using-yuan-settle-over-10pc
Regulated by the People’s Bank of China (PBC), the yuan is symbolised by ¥ and has a currency code of CNY (CNH on the offshore markets). The yuan is not legal tender in Hong Kong.
One yuan is made up of 10 jiao, and each jiao is made up of 10 fen. Its most frequent banknotes are ¥1, ¥2, ¥5, ¥10, ¥20, ¥50, ¥100, and all bills feature portraits of Mao Zedong. 3)Retrieved 1 September 2015 http://www.chinatoday.com/fin/mon/
History of the Chinese Yuan
Established on Dec. 1, 1948, the People’s Bank of China issued the renminbi yuan for the first time in the same year. In 1983, the State Council designated the PBC as a central bank. This was status was legally confirmed in 1995 by the National People’s Congress.4)Retrieved 1 September 2015 http://www.pbc.gov.cn/english/130712/index.html
The PBC has issued the renminbi yuan a total of five times, most recently in 1999.
The Communist Party of China (CPC) formed the PBC and introduced the modern yuan during the Chinese civil war. The new currency was a means of consolidating territory and provided a more stable alternative to the gold standard that had recently been introduced in territory controlled by the CPC’s rivals, the Chinese Nationalist Party (CNP). At the time, CNP territory was experiencing hyperinflation. This economic mismanagement, coupled with perceived corruption and several policy gaffes helped shift the war in favour of the CPC. The yuan was one of several stabilising factors during the conflict.5)Retrieved 1 September 2015 http://fee.org/freeman/the-great-chinese-inflation/
When the yuan was first issued in 1948, it was pegged to the USD at a rate of ¥2.46 per US$1. The yuan eventually strengthened to a high of ¥1.50 per US$1 in the 1980s and was later devalued and reached a low of ¥8.62 per US$1 in 1994. From 1997-2005, the yuan was pegged at ¥8.27 per US$1. When the peg was lifted in 2005, the yuan was revalued to ¥8.11 per US$1.6)Retrieved 1 September 2015 http://www.cmegroup.com/education/files/offshore-chinese-renminbi-market.pdf
The People’s Bank of China and the China Foreign Exchange Trade System (CFETS) manage the yuan by setting a daily fix against a basket of international currencies (mainly the USD) and allowing it to trade within a 2% band thereafter. This is known as a managed float or dirty float,7)Retrieved 1 September 2015 http://lexicon.ft.com/Term?term=managed-float
and does not apply to the CNH market. Since unpegging from the dollar, CNY has been allowed to trade against the USD within an increasingly wide band, from +/-0.5% in 2007 to +/-1% in 2012 and +/-2% in 2014.
Domestically, the PBC controls banks’ lending and deposit rates. These artificial rates incentivise the banks to loan to the public sector more than private sector (due to lower perceived risk with public borrowers), and as a result small- and medium-sized businesses have difficulty accessing financing. A shadow market has developed around domestic lending.
Since unpegging from the dollar in 2005, China has been actively pursuing the internationalisation of the yuan. The creation of an offshore version of the currency (CNH) has allowed China to make the yuan available for international trade settlement and financial transactions, while still protecting its capital account. The internationalisation of the yuan would represent significant savings of 2-3% in transaction costs.8)Retrieved 1 September 2015 https://www.db.com/en/media/At-the-centre-of-Renminbi-internationalisation–A-brief-guide-to-offshore-RMB.pdf
In the decade since unpegging from the USD, the yuan has steadily appreciated against most international currencies, though it is still thought to be significantly undervalued relative to the dollar.9) The yuan is still not easily accessible internationally, compared to the other major currencies. China is gradually addressing this international liquidity of the yuan through the creation of multiple CNH markets offshore, the continued development of its futures and equities markets, and the introduction of initiatives such as the Qualified Foreign Institutional Investor program.9)Retrieved 1 September 2015 http://www.cmegroup.com/education/files/offshore-chinese-renminbi-market.pdf
In August 2015, the PBC devalued the yuan by 2% against the USD, in an effort to manage the pace of trade-weighted appreciation. Because the USD dominates the basket against which CNY is managed, the recent sharp rise in the value of the dollar has pulled the yuan up relative to several other international currencies. These currencies include some of China’s major trade partners, and this most recent devaluation allows the yuan to ease some of the pressure on these partners’ currencies.10)Retrieved 1 September 2015 http://english.sse.com.cn/investors/introductiontoQFII/whatisQFII/
Economy of China
China is the world’s second largest economy in terms of GDP, but it ranks as the largest economy in terms of purchasing power parity (PPP).11)Retrieved 1 September 2015 http://fortune.com/2015/08/11/why-china-devalued-yuan/
China makes up 9.3% of global GDP and is the world’s largest exporter.12)Retrieved 1 September 2015 http://databank.worldbank.org/data/download/GDP.pdf
Its leading industries are machinery, apparel, furniture, textiles and integrated circuits. Its biggest export partners are the United States, Hong Kong, Japan and South Korea.
China’s major imports include machinery, oil and mineral fuels, nuclear reactor components, optical/medical equipment, metal ores, motor vehicles and soybeans. Its biggest import partners are South Korea, Japan, the United States, Taiwan, Germany and Australia. China’s labour force is 36.1% services, 30.3% industry and 33.6% agriculture, and the country has a 4.1% unemployment rate.13)Retrieved 1 September 2015 http://www.frbsf.org/economic-research/files/Lin.pdf
China faces several challenges in its pursuit of a gradual liberalisation towards the global economy. The yuan has appreciated more than tenfold since beginning its economic internationalisation in the late 1970s. To internationalise the yuan, the Chinese government and PBC aims to demonstrate the currency’s stability, strength and viability as an international tool for financial transactions.
To maintain that strength, the PBC strictly limits capital outflow while controlling exchange rates. Additional economic challenges include the condition of China’s major trading partners, several of which were severely affected by the global recession. Domestically, China faces environmental challenges with pollution and in increasingly looking to shift energy production towards cleaner technology, notably nuclear and alternative energy solutions.14)Retrieved 1 September 2015 https://www.cia.gov/library/publications/resources/the-world-factbook/geos/ch.html
In 2010, the People’s Bank of China and the Hong Kong Monetary Authority agreed to allow the RMB to be made deliverable in Hong Kong. This created an offshore market for the RMB, where it has the currency code CNH. CNH markets have since been created in London, Singapore and Taiwan.15)Retrieved 1 September 2015 http://www.businessinsider.com/difference-between-onshore-and-offshore-renminbi-2013-2
The major difference between the CNY and CNH markets is regulatory. CNY is tightly controlled by the People’s Bank of China, whereas CNH is allowed to trade more freely. The PBC cannot intervene in the price of CNH, and the daily fix and 2% trading band does not apply to the CNH market.
The People’s Bank of China and the State Administration of Foreign Exchange (SAFE) regulate the CNY market, while the Hong Kong Monetary Authority (HKMA) regulates the CNH market.16)Retrieved 1 September 2015 http://www.cmegroup.com/education/files/offshore-chinese-renminbi-market.pdf
The difference in value between the two symbols has allowed for significant arbitrage potential; many transactions with mainland China are settled in yuan, then converted to USD on the CNH market to take advantage of a more favourable exchange rate.17)Retrieved 1 September 2015 http://www.ecrresearch.com/chinas-currency-rmb-cny-cnh
Major CNY Currency Pairs
USD/CNY is the eighth most traded currency pair and the most popular CNY pair. No other CNY pair ranked in the top 30 most traded currency pairs. Overall, CNY is the ninth most traded currency.18)Retrieved 1 September 2015 http://www.bis.org/publ/rpfx13fx.pdf
Bills and Coins
The yuan comes in ¥1, ¥2, ¥5, ¥10, ¥20, ¥50, ¥100 bills and ¥1 coins. All yuan bills feature a portrait of Mao Zedong on one side; each denomination has its own colour and a landscape image on the other side of the bill.
¥1 is made up of 10 jiao. Jiao are available in denominations of one and five, and both come in the form of paper money and coins. One Jiao is made up of 10 fen, though fen are seldom used. Similarly, the ¥2 bill is uncommon.
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