The renminbi, often known as the yuan, is the currency of China and is pegged to the U.S. dollar, which is its main trading partner. China takes this precaution to protect itself from any dangers associated with fluctuations in the value of the dollar. China has also been charged with artificially depressing the value of the yuan to lower export prices, but it is challenging to demonstrate currency manipulation.
What is the Renminbi or Yuan?
"Yuan" or "renminbi" is the name of China's currency. The two words are used in slightly different ways. The term "people's currency," or renminbi, refers to all Chinese money. A unit of measurement is the yuan. "Cash" versus "dollars" is a useful way to conceptualize the difference.How the Yuan and the Dollar Relate
China's currency used to be tied to the USD, the country's main trading partner. It now controls its currency rate against a basket of the main trading partners' currencies, weighted according to the volume of trade they conduct with each. The USD continues to be heavily weighted in that basket at this time. The majority of international commercial transactions are conducted in dollars. Since the 1944 Bretton Woods Agreement, it has served as the world's de facto reserve currency. The value of the yuan is controlled by the People's Bank of China (PBOC) to fluctuate with the value of the dollar. Due to its variable exchange rate, the value of the dollar changes frequently. In July 2005, China abandoned its rigidly set currency rate system. As a result, although its currency is still carefully maintained, it is now more flexible. China's Methods for Amassing Dollars When they send products to the United States, Chinese exporters receive dollars. They put them in the banks in their communities. They receive renminbi from the bank in exchange, which they use to pay their employees and regional vendors. Dollars are then transferred from the local banks to the central bank. The dollars are used to buy interest-bearing US Treasury bonds. As a result, China is now among the biggest foreign holders of U.S. Treasury bonds as a result.How the Yuan is Managed by China's Central Bank
The PBOC keeps track of the yuan's exchange rate with the dollar. The bank will sell Treasurys on the secondary market if the dollar rises too far above the peg. Treasurys lose value as a result of the market's increased supply of them, which also lowers the dollar's worth. It also gives the PBOC funds so that it can buy more yuan, increasing the value of the currency.Why is China accused of manipulating its currency?
Currency manipulation can be applied to any nation that artificially maintains a low exchange rate to encourage cheap exports. Countries with weak currencies export more goods because their prices are lower than those of their rivals'. Proving currency manipulation is challenging. By its very nature, a fixed exchange rate exposes a nation to claims of currency manipulation. The accusing nation must demonstrate that the defendant intentionally kept its currency down to boost exports in order to win its case. The United States branded China a "currency manipulator" in August 2019. The U.S. Treasury Department claims China has a history of undervaluing its currency to obtain an unfair economic advantage. Since the yuan hit an 18-year high in 2014, China has been devaluing its currency. There are a variety of causes behind that. The yuan surged alongside the dollar in 2014 as the dollar increased by 15% against the majority of other major currencies. The yuan was therefore overpriced in comparison to other trading partners that were not tied to the dollar. The yuan was recognized by the International Monetary Fund (IMF) as an official reserve currency in 2015. The IMF demanded that market forces dominate the yuan more. As China's regulations were loosened, the yuan's market volatility increased. But contrary to popular belief, the yuan didn't increase. It dropped, showing that the yuan was overpriced in the eyes of the market. China depreciated the yuan in 2019. It might have been an attempt to counteract the rising price of tariffs brought on by President Trump's trade war. The United States declared China to be a currency manipulator later that year.What Impact Has the Yuan Had on You?
Consumers may view it favorably when the yuan's value is low because it lowers the costs of numerous goods imported from China to the U.S. and other nations. Computers, cell phones, clothing, toys, and sporting items are the most popular categories. Low import costs lessen the risk of inflation as well. One of the causes of the significant US/China trade disparity is the weak yuan. The other factor is that China's lower cost of living allows it to pay workers less than American businesses can. U.S. Treasury securities are popular in China, which lowers U.S. interest rates. By cutting the cost of loans and enabling Congress to raise federal spending, this stimulates the American economy. The peg to China affects the value of the dollar as well. The Chinese central bank, by expanding the pool of assets denominated in dollars, devalues the dollar when it sells Treasury securities. Some doomsayers predict that China may sell enough Treasury bonds to cause the dollar to collapse. However, a fall in the value of the dollar is unlikely to occur because it would be detrimental to China. Selling a sizable portion of Treasury bonds would cause China's remaining holdings to lose value swiftly. However, the United States shouldn't let itself incur such high levels of foreign debt.How Can I Make Chinese Currency Investments?
Due to its continued shaky ties with the dollar, investing in Chinese currency is not necessary. The only reason the yuan is rising is because the dollar is as well. The Chinese government has placed an additional risk. It might alter the yuan's value for political purposes. This is challenging to predict and can thus be profitable. If you're going to China, you might be worried that the exchange rate might go up before you leave. A currency fund investment would lessen this risk. Your investment would increase if the yuan increased. Your expected trip's greater costs would be compensated by this. Here are two well-liked Chinese currency exchange-traded funds:- The Chinese yuan strategy fund from WisdomTree (CYB)
- Market Vectors' Chinese Renminbi/USD ETN (CNY)
Questions and Answers (FAQs)
Are the renminbi and yuan interchangeable?
In the minds of most people, the Yuan and the Renminbi are essentially interchangeable. In everyday speech, the two terms are interchangeable. Technically speaking, the yuan is a renminbi measurement unit. Price amounts are frequently stated in "pounds," similar to how the British currency is known as the "pound sterling."What serves as the backstop for Chinese currency?
The yuan is ultimately supported by trust in the Chinese government because it is a fiat currency. The reserves held by the central bank of China total trillions of dollars and include gold and foreign exchange.