Currencies in China
Have you heard about the Chinese yuan? How about the Chinese Renminbi? Is China using two currencies? Many people get confused with which terms to use. In this article, we will discuss the currencies used in China and which terms are used. Furthermore, this article will also touch briefly on how the Chinese government handles its currency value and how businesses can convert their earnings in foreign currencies to the local currency.
Currency in China
China’s official currency is the renminbi (RMB). It became the official name of the Chinese currency in 1969.
In 2015, the International Monetary Fund (IMF) declared that the renminbi will be one of their reserve currencies, along with others on the list like the US dollar, the euro, the Japanese yen, and the British pound.
What is the Difference Between Yuan vs. RMB?
The name of the currency in China is renminbi. However, it is often used interchangeably with yuan, which is the unit used to denote the value of the renminbi. While there are differences between the meaning of the two terms, it is generally accepted to use either term in conversations when referring to Chinese currency.
The renminbi was first issued in 1948 during the Chinese Civil War, which helped enable the new administration to unify the economy that was previously divided by their use of different regional currencies. Moreover, the use of the renminbi distinguished the new government from the previous administrations where hyperinflation took over the economy.
In 1955, the RMB was revalued with each new yuan becoming equivalent to 10,000 units of the old yuan currency.
Yuan is the Chinese word which represents the silver coin minted by the Spanish empire, which was used by foreign merchants to trade in China around 400 years ago. In exchange for the local silk and porcelain, Chinese merchants wanted silver coins instead. Later on, as nations produced their trade dollars, China also minted their own and called the machine-minted dollar coin yuan. The largest yuan banknote in circulation is 100 yuan. Other denominations of the currency are 50, 20, 5, and 1 yuan.
How do you Differentiate Between Yuan and Renminbi?
A popular analogy to make it easier to understand the differences between the two is the British pound sterling versus the pound. British sterling is the currency of Great Britain, similar to how the renminbi is the currency of China. The pound is the unit of the sterling, while the yuan is the unit of the renminbi.
However, generally neither yuan nor renminbi is used by Chinese locals when referring to money. The more commonly used term is “kuai” which means a piece in Mandarin. It is a colloquial term that is similar to the UK “quid”.
Converting to RMB
There are two types of renminbi exchange rates used to distinguish the difference between onshore and offshore payments. The CNH currency is used to describe RMB currency traded outside of Mainland China, while CNY is the currency used for onshore RMB that is traded only within the Chinese mainland.
CNY is tightly controlled by the People’s Bank of China (PBOC) and is only allowed to trade within a 2% deviation from the day’s midpoint rate. In case the value exceeds this margin, the Chinese central bank steps in to manage the volatility.
CNH can be traded freely with other major international currencies like the USD, EUR, and JPY. Compared to CNY, CNH is loosely controlled by the government. However, the volume traded for CNH is relatively smaller.
Chinese exporters get paid in USD whenever they ship goods to the US. Chinese banks exchange dollars with renminbi, which is then used by businesses to conduct local transactions and manage worker payrolls.
The local banks then transfer the collected USD, or any other foreign currency, to the central bank. The collected USD can be used by the central bank to purchase US treasury bonds.
What is the Chinese Currency Backed By?
The Chinese renminbi used to be backed by the value of the US dollar alone. However, its exchange rate is valued against several different currencies, which is weighted by the level of trade that China conducts with each country. Currently, USD is the largest trading partner of China, therefore the RMB is closely tied to the value of the USD.
The PBOC is responsible for managing the value of the yuan, closely monitoring the dollar’s value to identify the strategy needed to maintain the stability of the local currency. Compared to the US dollar, which fluctuates because it is on a floating exchange rate, the yuan is managed on a strictly fixed exchange rate.
China has long been accused of currency manipulation. Any country can artificially keep its currency low value to boost exportation activities. Countries that have low currency values are usually preferred by businesses because their export fees cost less than the competition.
Currency manipulation, however, is difficult to prove, especially in a place like China which uses a fixed exchange rate. In 2019, the US accused China of manipulating its currency, saying that the country continues to undervalue its currency to gain an unfair competitive advantage over other exporting countries.
To date, China is still enforcing strict control over its currency’s value on fears that there will be a massive capital outflow once they loosen restrictions. Many Chinese investors might move their money out of the country and into other international markets.
Are Foreign Currencies Accepted in China?
According to the Provisional Regulations for Foreign Exchange Control of The People’s Republic of China, domestic organizations can retain a portion of their currency exchange receipts.
Local institutions are prohibited from possessing foreign exchange without authorization, depositing foreign exchange in an international account, or borrowing and acquiring foreign exchange without approval from relevant authorities.
Companies that perform international transactions are recommended to create a ‘general account’. This account will be used to receive and make payments to international entities using foreign currency.
A foreign exchange settlement account can also be created to receive funds from overseas and temporarily keep them in order to better manage the currency exchange risk. This helps avoid big losses due to sudden fluctuations in currency exchange rates. However, one of the major limitations of this type of account is that funds accumulated in the account cannot be freely used or transferred to other Chinese companies as payment for goods or services.
In a Nutshell
Even though the Chinese currency is known by various terms, the official name of the currency is renminbi. The PBOC closely monitors the value of the yuan to make sure it remains stable. The yuan is tied to the value of major international currencies, but the USD holds sway among them because it is the biggest trading partner of China. For businesses to convert their foreign earnings to the Chinese yuan, they have to exchange them with local banks first.
Local institutions are prohibited from holding foreign currency unless they have been legally approved to do so. Companies that involve daily international transactions are recommended to create a ‘general account’ to which all foreign currencies can be transferred to.
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