The Renminbi: An Overview of Its History, Use, and Impact

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The Renminbi, also known as the Chinese currency, has a rich history dating back to 1949.

It was first introduced as a replacement for the old Chinese currency, the yuan, and was pegged to the US dollar at a rate of 1:2.5.

The Renminbi's value has fluctuated over the years, with significant devaluations in 1994 and 1997.

The currency is issued by the People's Bank of China, the country's central bank.

The Renminbi is widely used in China and is also accepted in some other countries, including Hong Kong and Macau.

It's interesting to note that the Renminbi is also used as a reserve currency by some countries, such as South Korea and Japan.

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History of Renminbi

The history of Renminbi is a fascinating story that spans centuries. China was using currency similar to what we use today as far back as 210 BC.

The first emperor of China, Qin Shi Huang, dismissed the trading currency of the time and replaced it with copper coins. This was a significant development in the history of Chinese currency.

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The use of copper coins continued until the 9th century, when paper money was introduced into China's currency. Even then, copper coins remained a staple in China's currency offerings.

In ancient China, coins of gold, silver, and lead were used. Different values were made in different sizes, different weights, and bore different symbols.

The People's Bank of China introduced the Renminbi in December 1948, about a year before the establishment of the People's Republic of China. It was issued only in paper form at first.

The Renminbi replaced the various currencies circulating in the areas controlled by the Communists, including the silver dragon dollar, which was introduced in 1889. The silver dragon dollar was the first locally minted silver dollar or yuan accepted all over Qing dynasty China.

A revaluation occurred in 1955, at the rate of 1 new yuan = 10,000 old yuan, which helped to end the hyperinflation that had plagued China in the final years of the Kuomintang era.

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Renminbi Valuation and Exchange

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The renminbi's valuation and exchange rate have undergone significant changes over the years.

Until 2005, the value of the renminbi was pegged to the US dollar. This was a fixed exchange rate, which meant that the renminbi's value was directly tied to the dollar's value.

In 2005, the peg was finally lifted, and the renminbi was allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies.

The renminbi's exchange rate is managed by the People's Bank of China (PBOC), which establishes a reference rate every morning at 9:15 am using a basket of currencies.

The PBOC allows the renminbi to fluctuate within a narrow band of 2% above or below the reference rate, known as the daily trading band.

However, the renminbi's exchange rate can also be influenced by the State Administration of Foreign Exchange (SAFE) and other factors.

Credit: youtube.com, Valuation-wise Renminbi Starting to Look Cheap: Le

The renminbi's value is also affected by its purchasing power parity, which is the rate at which a currency's value can be converted into another currency based on the relative prices of goods and services in each country.

According to recent estimates, the renminbi's official exchange rate is within as little as 8% of its equilibrium value.

Here's a comparison of the exchange rates of CNY and CNH:

As you can see, there are slight differences between the exchange rates of CNY and CNH when converted from other currencies.

In general, CNH has been observed to be slightly weaker than CNY.

Renminbi Policy and Regulation

The People's Bank of China (PBOC) oversees the Renminbi (RMB) by establishing a trading band that restricts fluctuations in its exchange rate.

The PBOC works closely with other regulatory bodies, such as the State Administration of Foreign Exchange (SAFE), to ensure effective management of capital flows into and out of China.

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In contrast, the Chinese Yuan Offshore (CNH) isn't directly controlled but can be influenced by regulatory bodies, like the Hong Kong Monetary Authority (HKMA), depending on where it's traded.

The HKMA plays a crucial role in influencing the CNH market by appointing Primary Liquidity Providers (PLPs) to ensure smooth trading and liquidity.

Prior to the 1990s, China had an overvalued fixed exchange rate on its currency, which allowed the country to buy machinery from other countries at affordable prices and advance as an industry leader in the global economy.

Terminology

The renminbi has a complex terminology that can be confusing, especially for those who aren't familiar with the Chinese language. The formal currency name is renminbi, which literally translates to "people's currency".

The primary unit of the renminbi is called a yuan, which is also referred to as a "unit" or "circle". This is the most commonly used term when discussing the currency in formal contexts.

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In everyday Mandarin, the term "kuai" is often used to refer to a yuan, literally meaning "piece". This is a colloquial term that is widely used in informal conversations.

Here's a breakdown of the terminology used for different units of the renminbi:

In addition to these terms, the currency is also sometimes referred to as the "redback", a play on the slang term "greenback" for the US dollar.

Equilibrium Rate Transition

China's transition to a market-oriented exchange rate was a gradual process that involved significant changes in the official exchange rate, the use of a dual exchange rate system, and the introduction of foreign exchange markets.

The process began in 1979 with the State Council's approval of a system allowing exporters to retain a share of their foreign exchange earnings, known as foreign exchange quotas. This was a crucial step towards liberalizing trade and current account transactions.

Exporting firms that retained foreign exchange above their own import needs were allowed to sell the excess through the state agency responsible for exchange controls and foreign exchange reserves, the State Administration of Exchange Control, as early as October 1980.

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The government introduced an internal settlement rate of ¥2.8 to 1 US dollar, which was a devaluation of almost 100%, to gradually allow market forces to take the dominant role.

By the mid-1980s, the government sanctioned foreign exchange markets, known as swap centres, in most large cities, further increasing the role of market forces in determining the exchange rate.

In 2012, the renminbi was within as little as 8% of its equilibrium value, thanks in part to appreciation actions by the Chinese government and quantitative easing measures taken by major central banks.

The Chinese government has stated that the basket of foreign currencies used to determine the exchange rate is dominated by the US dollar, euro, Japanese yen, and South Korean won.

Policy Evolution Since 1994

In November 1993, the Third Plenum of the 14th Central Committee of the Chinese Communist Party approved a comprehensive reform strategy that highlighted foreign exchange management reforms as a key element for a market-oriented economy.

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Foreign exchange management reforms have been a crucial part of China's economic development, with a floating exchange rate regime and convertibility for renminbi seen as the ultimate goal of the reform.

Conditional convertibility under current account was achieved by allowing firms to surrender their foreign exchange earnings from current account transactions and purchase foreign exchange as needed.

Restrictions on Foreign Direct Investment (FDI) were loosened, and capital inflows to China surged as a result.

The fen and jiao denominations have become increasingly unnecessary as prices have increased, with coins under ¥0.1 used infrequently by Chinese retailers.

Chinese retailers tend to avoid fractional values, opting instead to round to the nearest yuan, which has contributed to the decline in the use of smaller denominations.

The People's Bank of China (PBOC) plays a crucial role in overseeing the renminbi, establishing a trading band that restricts fluctuations in its exchange rate and ensures effective management of capital flows into and out of China.

The State Administration of Foreign Exchange (SAFE) establishes the rules and regulations that govern foreign exchange activities in China, working closely with the PBOC to ensure a stable exchange rate.

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The PBOC's trading band has been adjusted several times since its introduction, with the band extended from 0.3% in July 2005 to 2% in March 2014.

China has stated that the basket of foreign currencies used to determine the renminbi's exchange rate is dominated by the United States dollar, euro, Japanese yen, and South Korean won, with a smaller proportion made up of other currencies.

Limitations

One of the key limitations of the Renminbi is its restricted access to the market. CNH, the offshore version of the Renminbi, can be traded freely against other currencies in international exchange markets.

The Chinese government imposes buying and selling restrictions on the CNY, limiting its accessibility to residents of Mainland China. This has significant implications for businesses and investors looking to engage with the Chinese market.

Interest Rate and Green Bonds

In May 2023, RMB interest rate swaps were launched.

This marked an important development in the evolution of Renminbi policy and regulation.

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RMB interest rate swaps allow for the management of interest rate risk in RMB-denominated assets.

The launch of RMB interest rate swaps has the potential to increase the use of the RMB in international financial markets.

In June 2023, the Government of the Hong Kong Special Administrative Region of the People's Republic of China announced a green bonds offering, of approximately US$6 billion denominated in USD, EUR and RMB.

This green bonds offering was part of the Government Green Bond Programme.

Foreign Certificates, 1980–1994

From 1980 to 1994, Foreign exchange certificates (FECs) were the primary means of transaction between China and foreign visitors.

These certificates were issued by the Bank of China and were exchangeable for foreign currencies at the prevailing official rate, which ranged from US$1 = ¥2.8 FEC to ¥5.5 FEC.

FECs were issued as banknotes from ¥0.1 to ¥100 and were officially at par with the renminbi.

Tourists used FECs to pay for accommodation and luxury goods sold in Friendship Stores.

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However, an illegal black market developed for FECs where touts approached tourists outside hotels and offered over ¥1.50 RMB in exchange for ¥1 FEC.

In 1994, the renminbi was officially devalued from US$1 = ¥5.5 to over ¥8, and the FEC was retired at ¥1 FEC = ¥1 RMB in favor of tourists directly using the renminbi.

Futures Market

The futures market for Renminbi is a significant aspect of its policy and regulation. Renminbi futures are traded at the Chicago Mercantile Exchange. The exchange rate published by the People's Bank of China is used to settle these futures contracts.

Frequently Asked Questions

When did China change from yuan to renminbi?

The People's Bank of China introduced the renminbi in December 1948, not as a replacement for the yuan, but as a new currency. The renminbi and yuan are often used interchangeably, but technically, the yuan is a unit of the renminbi.

Ann Lueilwitz

Senior Assigning Editor

Ann Lueilwitz is a seasoned Assigning Editor with a proven track record of delivering high-quality content to various publications. With a keen eye for detail and a passion for storytelling, Ann has honed her skills in assigning and editing articles that captivate and inform readers. Ann's expertise spans a range of categories, including Financial Market Analysis, where she has developed a deep understanding of global economic trends and their impact on markets.

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