Trading Chinese Yuan (Renminbi)

The Chinese economy has been rapidly growing for decades, now sitting as the second largest in the world, trailing only the USA. This growth in economic prominence and the resulting importance of its currency, the Chinese yuan (renminbi), is exciting for many forex traders. Today’s geopolitical climate, particularly between China and the US, provides further volatility and opportunity for investment and speculation in the forex markets. This volatility is, however, limited to some extent by the Chinese government, which intervenes with the natural market of the renminbi’s exchange rates. Find out more about forex trading economics and how to start investing in the Chinese yuan today.

The Renminbi & Yuan

While the official currency is called renminbi, and has the symbol RMB, the unit is a yuan, pronunciation ‘yoo-an’, and this is the more common name. The Chinese yuan has a similar symbol or logo to the Japanese yen sign, but with two lines across the Y.

Things get more complicated when trading the Chinese yuan in forex as there are two distinct markets. The yuan is traded both onshore and offshore, due to restrictive capital controls from the Chinese government that prevent the currency leaving China. The onshore market, traded in mainland China, is given the forex symbol CNY (the CH denoting China and the Y denoting yuan).

The offshore market was introduced in Hong Kong, with the abbreviation CNH (H for Hong Kong). The yuan market has since spread, now including many offshore markets such as the London and Taiwan denominations with the codes CNL and CNT, respectively.

The onshore market is heavily controlled by the Chinese government and mostly driven by corporate bodies who buy RMB against foreign currencies for business purposes and settlements between banks. This provides some trading possibility for those within the borders of China.

Any trading done on the renminbi beyond the Chinese borders is done with CNH, or other offshore Chinese yuan markets. The CNH markets are much less controlled by the government, instead being driven primarily by the supply and demand of the currency in the forex markets. This makes the currency ripe for speculation, hedging and investment. It is important to note, however, that the People’s Bank of China (PBOC) still manages the offshore market somewhat.

The differences in driving forces for the two markets mean that the CNY and CNH often have different prices, however, there tends to be strong correlation in curves and trends. Generally, the CNH is more volatile in its reactions to certain events as the government intervenes in the CNY market to match economic policies. Disparities between the two can be indicative of capital outflows, with lower levels of outflow correlating to a stronger relative level of the CNH.

Trading the USD/CNH Vs USD/CNY

The government has a lot of control over the Chinese yuan price levels through PBOC and state banks. Policy makers fix the Chinese yuan at a target value each day based on economic policies, the previous day’s closing rates and the valuation of a basket of other currencies. Once this target, or midpoint value, is set each morning, the CNY trades within 1 percent either side of this midpoint. If the price goes beyond this band, the PBOC will buy or sell some currency as required.

An additional control, the countercyclical factor, was introduced in 2017. This helps to mitigate large swings in either direction, resulting in a more stable currency that is more attractive to foreigners.

Currency Regimes

The Chinese currency market has had many regimes over the past few decades, each with varying levels of intervention from the government. From a dual-track system before 1994, a quasi-fixed rate was established for 11 years, settling at 8.28 USD/CNY. After 2005, the flexibility of the currency was increased to a manage-floating exchange rate system that pegged the yuan against a basket of currencies, instead of just the US dollar.

The Chinese yuan was re-pegged following the 2008 crisis to a restricted range of 6.81 to 6.85 against the USD to protect international trade. After the crisis, in 2010, the liberalisation of the currency was resumed, and the Chinese yuan trading band grew from 0.5% to 2% over four years. In 2018, the CNY was re-set against a basket of currencies and the managed-floating regime is still used today. Below is a price chart showing the history of the Chinese yuan’s exchange rate against the US dollar since 1992.

USD/CNY history trading chart

The CNH is a much newer currency, with preparation for its release beginning in 2004, when Hong Kong began to introduce business in RMB. On 23 August 2010, the Chinese yuan (CNH) currency was launched and the first quote for USD/CNH was released. The picture below shows the CNH’s exchange rates up to 2018.

USD/CNH investing chart

The Next Top World Reserve Currency?

The Chinese government has aims to internationalise their currency through development of offshore RMB markets, increased use in cross-border investment and expansion in foreign trade settlements (now the second largest currency after USD).

The Chinese government demonstrated their commitment to these aims through the establishment of the Contingent Reserve Arrangement and the Asian Infrastructure Investment Bank (AIIB). In 2013, the government also made economic reforms that led to the International Monetary Fund (IMF) elevating the Chinese yuan to a global reserve currency. The reserve currencies joined by the Chinese yuan include the USD, EUR, GBP and JPY. The rankings of reserve currencies have historically followed those countries with the highest incomes. Therefore, many believe that China will eventually rise to the top of the reserve list, taking the title away from the US.

The reserve status of the RMB means that central banks outside of China hold significant quantities of the currency for foreign exchange. This allows more frequency and volume for international trade and transactions as well as economic benefits for China. The status also implies a level of stability of the currency, improving investor confidence.

The Trade War

In 2018, geopolitical events resulted in the US government imposing import tariffs up to $60 billion. This prompted a trade war between the two superpowers, with closer to $600 billion in tariffs having been implemented by the US government, and $185 billion by the Chinese government by the end of 2020.

The market most affected by these events is the USD/CNH, although the impacts will filter down through almost all global markets, from the euro-yuan market to company stocks and commodity prices. The trade war has primarily manifested itself through the volatility of the above forex pair, with CNH dropping to 6.235 in March 2018, lower than it had been since 2015, then shooting up to 7.195 in September 2019, the highest the yuan had ever been.

The two countries reached some level of agreement in January 2020 when China agreed to boost US imports by $200 billion and the US agreed to halve some of their tariffs. However, the trade war is ongoing, with tariffs still imposed and no sign of the Biden administration intending to resolve the issue.

USD vs CNY trade wars

In terms of the trade war’s impacts on the value of the Chinese yuan to the US dollar, there are several possibilities. One option is for China to offset the impacts of the US-imposed tariffs, as they only import from the US a third of what the US imports from China. This offset can be carried out through devaluation of the Chinese yuan such that the percentage influence on imports was reflected in a percentage drop of the Chinese yuan exchange rate.

Alternatively, the two countries could hit an impasse that lasts a long time, with no significant effects on either currency and the Chinese government maintaining the strength of the yuan so as not to incur further tariffs. If, however, a trade deal were to be finalised, the yuan may appreciate slightly. This is likely to be limited, though, as there will probably be clauses that remove the possibility for significant future depreciation.

Indicators & Impacts

The country’s government retains a strong hold over the valuation of the Chinese yuan coins and banknotes in the forex markets, keeping it permanently undervalued for international competitiveness. This contributes to a low trading volume in the forex markets, as speculation is more difficult and the PBOC can intervene, increasing risks of loss. While some experienced traders like this level of volatility and risk, there may be profit opportunity for others when control is released, as the currency may appreciate.

The health and performance of the Chinese economy has a major impact on the price of the currency. The GDP reports released by the Chinese National Bureau of Statistics are a good indicator of the economy’s growth and has good links to the fiscal and economic policies the government enacts. The reports are delayed by 45 days after the reference period and provide both year-on-year and quarter-on-quarter statistics.

Industrial production figures, also released by the Chinese National Bureau of Statistics, are another indicator of economic performance. These statistics give production levels in different sectors of the economy, adjusted for inflation.
China also releases purchasing managers indexes (PMIs), both on manufacturing and non-manufacturing sectors. These survey companies for business conditions and are demonstrative of expansion or contraction in the relevant sectors and economic areas.

Alternative Ways To Invest In CNH

Beyond speculating on forex pairs involving Chinese yuan, or other renminbi tickers, there are several options for investing in the currency. Futures are offered on some exchanges, including the CME, which involve speculating on the change in exchange rate of the Chinese yuan from today’s quote to a specified date in the future. Futures can be leveraged, as with forex pairs, though usually to a lesser level.

Another approach is to invest in exchange traded funds (ETFs), like the Chinese Yuan Dim Sum Bond Portfolio Fund or exchange traded notes (ETNs) that are designed to match the performance of the Chinese yuan or economic interest rates. These will not only appreciate with the currency, but also pay out dividends.

Alternatively, HSBC and other banks offer Chinese yuan savings accounts and time deposit accounts that can be opened with local currencies but are denominated in renminbi. This essentially allows you use money like the UK’s pound sterling to buy Chinese yuan as cash and hold it in these accounts so that invested funds appreciate with the currency, though withdrawals must also be made in different currencies and may incur a conversion fee.

Final Word On Chinese Yuan

It is very difficult to predict the future of the Chinese yuan, as it is with most currencies. However, the outlook is generally positive thanks to the continued growth of the Chinese economy, the rise in prominence of its currency, gaining reserve status, and the likely liberalisation of the yuan’s management. However, the ongoing trade war’s influence on the volatility of the renminbi may put some traders off.

While some may find the Chinese yuan an exciting trading opportunity, the continued intervention of the People’s Bank of China will keep the currency from reaching the popular trading volumes of major free market currencies.

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