As the Chinese economy becomes the second largest in the world and the Chinese currency, the renminbi, becomes the fifth most traded globally, there’s plenty of confusion over how it all actually works.
For a start, why do we also call the renminbi the yuan?
It’s very much like calling sterling the pound. Renminbi and sterling are the official names of the currencies, while the yuan and the pound are the units of that currency.
In other words, just as you wouldn’t say that an item cost “one sterling” but “one pound”, you don’t say that an item costs “one renminbi” but that it costs “one yuan”.
Incidentally, the renminbi, which has the foreign exchange code RMB, means the “the people’s currency” in Mandarin and was first issued in 1948 by the People’s Bank of China as a unified currency for use in Communist-controlled territories.
So what about CNY and CNH?
They are both codes for the yuan but the CNY is the code for China’s onshore currency, which can only be traded in mainland China, and CNH is the code for its offshore currency that is traded outside.
The key difference is that while the former is under the strict control of the PBoC, which regulates its movements, the latter is allowed to move more freely.
As such, the CNY was never a freely-floating currency and was initially pegged at 2.46 to the dollar. In the 1980s it was allowed to rise to 1.50 to the dollar but had fallen by 1994 to 8.62 to the dollar. It was revalued in 2005 to 8.11/dollar and linked to a narrow trading band against the US currency, since when it has appreciated by about 30%.
More recently, the trading band was widened to 2% from 1% but the PBoC still dictates its moves through a daily fixing designed to smooth out the currency’s appreciation or depreciation as it sees fit.
By 2005, however, as China began to open up its economy and as the currency was starting to be used in international markets to settle trade and financial transactions, China wanted to create a way of trading the yuan without exposing its capital account to capital outflows.
Thus was born the CNH.
First, currency deposits for personal banking were allowed in Hong Kong, the international trading hub that had been returned to China from the UK in 1999. As yuan, or renminbi, bond markets developed and deposits grew, the offshore currency became even more widely traded in major international financial centres such as Singapore, Taiwan and London as the Chinese authorities slowly lifted restrictions.
So what China now has is a dual currency system, each with its own exchange rate. Buying and selling of the onshore CNY remains restricted and can only be used by mainland China residents for the trade of goods in and out of the country. It is only convertible on the current account, i.e. for trade, as opposed to the capital account, which is for investment and banking flows.
By comparison, the CNH is allowed to float freely with no restrictions on cross-border trade settlements and can be used for both current account and capital account transactions in offshore markets.
Of course, this led to a difference between the CNY and the CNH rates against the dollar. However, the PBoC moved to resolve this last summer by intervening in the CNH market to narrow the spread and bring it more into line with the CNY.
This was done at the request of the International Monetary Fund as China moved to internationalise its currency even further by making it one of the major reserve currencies in the IMF’s Special Drawing Rights basket. The move has so far worked, with both the CNY and the CNH rate around 6.54 to the US currency.
After all that, don’t be surprised if when you go to China you hear neither of the terms renminbi or yuan being used. That’s because the Chinese themselves use the term “kuai”, essentially a word that means dollar.