Renminbi

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The renminbi - literally "people's currency" - or the yuan is the official currency in the mainland of the People's Republic of China (PRC). It is issued by the People's Bank of China, the monetary authority of the PRC. The official ISO 4217 abbreviation is CNY[1], although also commonly abbreviated as "RMB".

There are two types of yuan: onshore (CNY) yuan, which is traded on the mainland, and offshore yuan (CNH), traded through the Bank of China in Hong Kong and available to be bought and sold by international investors. The CNH floats freely, unlike its onshore counterpart, which moves as a crawling peg to the US dollar. The CNH was introduced as part of China's efforts to internationalize the yuan.[2]

China controls the value of its currency by setting a daily rate for the yuan versus the dollar. In the country's domestic market, traders are allowed to push the yuan 2 percent stronger or weaker for the day. But the People’s Bank of China sometimes sets the yuan stronger versus the dollar even when the market is signaling it sees the yuan as weaker.[3]

On January 4, 2006, an OTC trading system was introduced in the interbank spot foreign exchange market, while an electronic matching system was also retained. At 9:15 a.m. on each business day, the China Foreign Exchange Trade System (CFETS) releases the central rate for the RMB against the U.S. dollar, Euro, Japanese yen, and HK dollar for that day, and that exchange rate becomes the central rate in the interbank spot foreign exchange market (including the OTC trading system and the electronic matching system) as well as at the bank counters.[4]

Before the market opening on each business day, the CFETS obtains price quotes from all market makers, and after excluding the highest and lowest prices, the weighted average of the remaining prices becomes the exchange rate for the renminbi against the U.S. dollar for that day. The CFETS decides the weighting for averaging, based on a variety of indicators, such as the reporting bodies' transaction volume in the interbank foreign exchange market and pricing situation.[5]

Distinction between "renminbi" and "yuan"

While the two terms are often used interchangeably in the news, they are not precisely the same thing. Renminbi refers to China's currency in general, while the yuan is the name of the lowest-denomination unit of the currency. "Yuan" is roughly equivalent in concept to "dollar" or "kroner", whereas "renminbi" encompasses the yuan and several other denominations as well. [6]

History

The yuan was first introduced in 1889 as a silver coin derived from the Spanish peso. The peso had been widely circulated in South East Asia since the 1600s because of the Spanish presence in nearby Guam and the Philippines. The yuan replaced copper cash and silver ingots called sycees. Around that same time the yuan was also issued in banknotes.

The modern yuan or renminbi was first issued by the People’s Bank of China in December of 1948, when China was involved in a civil war between the Communist Party and the Nationalists. At the end of the war, the communists won the mainland. The country was stuck with high inflation, and in 1955 a second series of yuan was issued that replaced the old one at a rate of 10,000 old yuan to one new yuan. This resulted in a more stable economy.[7]

In 1994 the renminbi was pegged to a fixed rate of 8.28 yuan to the US dollar. That remained until July 2005, when it was allowed to fluctuate 2.1 per cent from a set midpoint determined daily. Over the following year, that peg has been adjusted by the government as it deemed necessary, including placing a halt on its appreciation during the global financial crisis of 2008 when demand for Chinese goods slowed.[8]

In 2014, the PBOC doubled the currency’s daily trading band as part of its commitment to let markets play a greater role in the economy.[9]

On August 11, 2015, the People's Bank of China announced their decision to devalue the yuan. The central bank set its official guidance rate down nearly 2 percent to 6.2298 yuan per dollar, its lowest point in nearly three years. The devaluation followed data that showed China's exports fell 8.3 percent in July and that producer prices were in their fourth year of deflation.[10] The decision effectively lowered the price of exports and increased the cost of imports for buyers in China.[11]

The PBOC shifted the official exchange rate again the following day, allowing the currency to slide by another 1.9 percent.

Many analysts viewed the devaluation as China's attempt to make its exports more competitive in a slowing economy, but some also interpreted it as a move that China hopes will get the yuan into the International Monetary Fund's basket of currency reserve assets known as special drawing rights (SDR).[12] However, on Augusts 19, 2015, the IMF signaled that the yuan would not be added to the basket of reserve currencies for at least a year. Beijing has outlined plans to liberalize its financial markets, but the yuan doesn’t currently meet the IMF’s key criterion that reserve currencies must be “freely usable,” meaning countries could face problems trying to buy and sell the yuan in a pinch.[13]

References

  1. ISO 4217 currency names and code elements. International Organization for Standardization.
  2. 'Dirty float': how China manages its currency. The Sydney Morning Herald.
  3. 5 Things to Know About China's Currency Devaluation. The Wall Street Journal.
  4. Public Announcement of the People’s Bank of China on Further Improving the Inter-Bank Spot Foreign Exchange Market. China Foreign Exchange Trade System.
  5. Trade Service. China Foreign Exchange Trade System.
  6. Wait, What's The Difference Between 'Yuan' And 'Renminbi'?. NPR.
  7. History of the Chinese Yuan. CurrencyInformation.org.
  8. 'Dirty float': how China manages its currency. The Sydney Morning Herald.
  9. Currency Market Cautious on Renminbi Policy Change. The New York Times.
  10. China Devalues Yuan After Poor Economic Data. Reuters.
  11. With Yuan Devaluation, China Digs a Hole for Commodities. The Wall Street Journal.
  12. There's an important, overlooked angle to China's big move in the currency market. Business Insider.
  13. IMF Signals Yuan Won’t Become Reserve Currency for at Least a Year. The Wall Street Journal.