Understanding the ins and outs of the Chinese currency can seem confusing for those who don’t have first-hand experience with it, and it all starts with the name. Officially, the Chinese currency is the renminbi, which translates to ‘people’s currency.’ However, yuan is also commonly used for Chinese money, and this usage is more prevalent in international contexts.
While not many people were interested in the renminbi/yuan until recently, China’s recent rise to a global economic powerhouse has been followed by increased interest in its currency. This article is intended to be a guide to the yuan and will explain everything you wish to know about it, including how it interacts with the dollar. But first, let’s start with a short history.
Money has been used in China for millennia and the oldest existing paper notes in the world are from the Ming Dynasty, dating from the 14th century C.E. They were printed on mulberry bark and can be found on display in various museums around the world. However, the history of the renminbi starts much later, in 1948.
Prior to 1948, various currencies called the yuan or dollar were used in China and were derived from the Spanish American silver dollar. The People’s Bank of China introduced the renminbi in 1948, and it replaced the various currencies in the territories held by the Communist Party until the Party gained total control and the renminbi/modern yuan became the official currency.
Since its introduction, the renminbi has undergone several changes. In the 1950s, the People's Bank of China (PBOC) began to issue renminbi banknotes and coins. In the 1980s, the Chinese government began to move the renminbi towards a convertible currency and began to introduce reforms aimed at making the currency more market-based.
In 1994, the PBOC allowed the renminbi to float against the US dollar, though it was still subject to government control. In 1997, the PBOC began to allow the renminbi to be traded in foreign exchange markets. In 2005, the renminbi was officially declared a convertible currency.
Arguably the most important moment for the yuan was in 2016 when the International Monetary Fund proclaimed it one of its reserve currencies. This was done due to China’s influential position regarding the world economy and made the yuan one of the world’s preeminent currencies.
The official name of the Chinese currency is the renminbi and, strictly speaking, the yuan is the unit of measurement. However, both are used interchangeably. One yuan is divided into ten jiao, which is divided into 10 fen. Thus, 100 fen is 1 yuan. However, notes or coins below one yuan are rarely seen or used as they have almost no value due to inflation.
The renminbi is abbreviated to RMB, and the ISO code is CNY. When written in Latin script, the symbol for the renminbi/yuan is ¥. However, the Chinese character 元 is used locally in China. Further, Chinese locals often use the word kuai to refer to the renminbi/yuan.
The yuan is printed in ¥1, ¥5, ¥20, ¥50, and ¥100 banknotes; ¥1 coins, as well as 1 and 5 jiao, and even 1 fen coins are available. Some larger denomination commemorative coins are also issued, but these are mostly used as collectibles. However, as was previously mentioned, denominations of less than ¥1 are rarely used due to having almost no value.
Interestingly, The People’s Bank of China has started testing the digital yuan. It is a digital currency, but not cryptocurrency, that is designed to be legal tender backed by the PBOC and have equivalent value to the traditional yuan. Because the digital yuan is still being tested, it is hard to speculate how it will be implemented and what effects it will have.
The US is China’s largest trading partner, and China pegs the yuan to the US dollar. This means that the yuan's value is tied to the dollar, and consequently rises and falls accordingly. This is called a fixed exchange rate and is not uncommon for countries that want to keep the value of their currency stable and provide security for investors.
Additionally, this means that the yuan is often not too interesting for speculators who invest in risky currencies. Because the yuan is pegged to the dollar, large fluctuations in the value due to forex market factors are much less likely than is the case with other, more exotic currencies. Conversely, the stability of the yuan allows for safer investments.
Further, China is one of the largest holders of US Treasury securities. Chinese exporters to the US are paid in dollars, which they in turn deposit in local banks and exchange for yuan. These dollars are then transferred to the People’s Bank of China, which uses the dollars to buy Treasurys. The amount of Treasurys the PBOC hold are important for managing the value of the yuan.
Because the yuan is pegged to the dollar, the PBOC monitors the value of the dollar. In simple terms, the value of a currency is determined by supply and demand. When the value of the dollar rises too far above the peg according to PBOC’s estimates, it manages the supply and demand of both the yuan and dollar.
The PBOC sells some of the Treasury securities it holds on the secondary market, increasing their supply, thus lowering their value and, correspondingly, the dollar’s. Then, it buys yuan with the money gained from selling the Treasurys, increasing the demand and, consequently, the value of the yuan.
In 2019, the US accused China of currency manipulation – keeping the value of their currency artificially low to be able to export cheaper products than their competitors. Currency manipulation is difficult to prove, but as China does have a fixed exchange rate (although more liberal since it became an IMF reserve currency in 2016) and the value of the yuan is kept low, accusations of currency manipulation abound.
This was the first time in 25 years that the US had used the term to describe a major trading partner. In response, China accused the US of engaging in "trade bullyism" and said it would take "necessary countermeasures."
While the value of the currencies and the economic interplay of two such powerful countries, especially long-term, is extremely complex and dependent on a multitude of factors (and subject to many theories and speculations), the immediate impact on regular citizens can be viewed as twofold.
For one, the low value of the yuan allows for cheap exports, allowing consumers to purchase low-cost imported goods. On the other hand, the low value of the yuan means that production is also much cheaper in China, which can lead to outsourcing production there, consequently leading to fewer jobs in the US.
In addition, fluctuations in the value of the Yuan can affect the stock market in the US, as investors could be uncertain about how Chinese economic policy will affect the global economy.
Even though the Chinese currency has such close ties to the dollar, selling or buying Chinese yuan is not always possible at many banks or exchange offices. However, US First Exchange allows you to trade in most major, minor, and exotic currencies, including the yuan, from the comfort of your home.
You can buy or sell yuan online and we will have it delivered to your doorstep. You can pay by credit card, bank draft, or money wire and we will send you a secure package containing crisp and high-condition yuan banknotes within 24 - 48 hours.
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