The Chinese yuan is the currency used in The People’s Republic of China. In an actual sense, the currency is called the Renminbi (RMB), but it is denominated in units called yuans. In the international currency market, it is abbreviated as CNY. In Hong Kong, it is abbreviated as CNH. The yuan comes in various denominations, the smallest being a 1 yuan note and coin, while the largest is a 100 yuan note. Each yuan comprises 10 jiao, while each jiao comprises 10 fen.
History of the Chinese currency
The story of the modern yuan begins in war – the Chinese civil war. This war was between the forces of the Republic of China and those of the Chinese Communist Party (CCP) from 1927 to 1949. The communists introduced the yuan as legal tender in the areas they controlled, which replaced the gold standard which had been introduced by their rivals, the nationalists.
The Chinese Nationalist Party had economically mismanaged the regions they controlled, leading to hyperinflation. This was amidst allegations of widespread corruption and poor policies. With the introduction of the yuan in 1948, the war shifted in favor of the communists and was over the following year.
Today, the yuan is controlled by the People’s Bank of China (PBoC). This bank was reinstated by the State Council in 1983, and again in 1995 by the National People’s Congress. The yuan has been issued 5 times since its introduction, with the latest issue being in 1999.
Chinese monetary policy
Upon its introduction, the yuan was pegged to the US dollar at 2.46 yuan per USD. By the 1980s, it had risen to 1.50 yuan per dollar. The bank later devalued it, bringing it to 8.62 yuan per dollar in 1994. Come 1997, the peg rate was at 8.27 yuan per $1. Eventually, in 2005, the peg was lifted, at which point the yuan bore the value of 8.11 yuan per dollar.
Since the lifting of the peg, the PBoC controls the value of the yuan by comparing it to a basket of international currencies and allowing it to trade within a 2% band of this basket. This is called a dirty float. The USD takes the highest percentage in that basket.
China has been trying to internationalize its currency. By creating an offshore currency (CNH), they made their currency available for international trade, while still maintaining their control over their primary currency.
In 2015, PBC again devalued the yuan against the dollar by 2%. This was to dampen the effects of the appreciation of the yuan from the Chinese trade balance.
The state of the Chinese economy
China is an economic giant on the global scene, accounting for nearly 9% of the global GDP. Further, it is ranked second in size when it comes to GDP, but it is first in terms of purchasing power parity. In terms of exports, China takes the crown as the largest exporter. Their goods are mostly sent to the US, Hong Kong, South Korea, and Japan. In turn, they import goods from the US, Germany, Taiwan, and Australia, among others.
Following China’s economic prosperity, the yuan has appreciated more than 10 times since it was internationalized. To maintain its stability, the PBoC keeps strict control on capital outflow and exchange rates. Further, China’s impressive response to the COVID-19 pandemic has seen its currency thrive against most other international currencies.
Today, the USDCNY pair ranks eighth on the list of most traded pairs globally. No other pairs containing the CNY ranked anywhere close to it. Generally, however, the CNY is the ninth-largest currency in the world.
Why do traders avoid trading the yuan?
For one, although China is a developed country, the USDCNY pair is still considered an exotic pair. As such, its traded volume, and hence its liquidity and volatility, is not as high as that of the major forex pairs. To that end, trading this pair is reserved for seasoned traders who can navigate this lack of liquidity and volatility with ease.
Another reason that discourages investors is the chokehold that the PBoC has on the Chinese yuan. Due to their strict control, the CNY is still greatly undervalued against the dollar, to this day. Since the 2008 financial crisis, however, China has been less stringent on its control over its currency, and they are taking measures to allow it to be more open to international market forces.
To solve this issue, the PBoC will have to cease undervaluing their currency against the dollar and allow it to move freely in the forex market.
Reasons to trade the Chinese yuan
- Predictability: The USDCNY pair is characterized by low volumes and low volatility, which means its price moves are relatively more predictable. This makes it suitable for long-term trades.
- Opportunity for portfolio diversification: Due to its lack of popularity, the USDCNY marketplace is mostly filled with experienced investors looking to diversify their portfolios. Here, they can apply their expertise to benefit from situations that less experienced traders wouldn’t be able to spot, which may lead to substantial profits.
- Challenging opportunities: Some traders like the challenge of the road less traveled, as it presents them with opportunities to come up with new, out-of-the-norm trading strategies. The USDCNY pair provides such opportunities, especially for expert traders.
Conclusion
China is one of the world’s largest economies, and as such, its currency should bear as much, or even more value than the rest of the major currencies. However, the Chinese central bank, PBoC, exercises strict control over CNY’s exchange rate, and they keep devaluing it against the dollar. For that reason, many traders shy away from the USDCNY pair, which gives it an exotic pair status. If China were to let their currency freely move in the international market, it would provide a lucrative opportunity for profit. Until then, the pair is reserved for more experienced traders who do not mind the low volumes, low liquidity and volatility, and consequently, the high trading costs associated with CNY pairs.