Chinese Yuan (CNY)
The CNY, or Chinese yuan, is the official currency of the People’s Republic of China and is commonly referred to as the yuan. The CNY is used for all domestic transactions within mainland China and is regulated by the People’s Bank of China (PBoC), the country’s central bank.
This guide will help you understand the CNY and its role in global markets.
Quick Introduction
- China’s yuan exists in two forms: CNY (onshore yuan) and CNH (offshore yuan). CNY trades within mainland China, while CNH is traded more freely in international markets.
- The CNY is the world’s eighth-most traded currency, but with China’s growing economic power, there’s speculation that the CNY could challenge the US dollar’s dominance.
- The CNY is tightly regulated by the PBoC, which sets a daily reference rate and allows the currency to fluctuate within a narrow band.
- If you want to trade the Chinese yuan through trading platforms you will need to use the offshore yuan, CNH. See our list of the top brokers with CNH trading.
Understanding Renminbi & Chinese Yuan
The terms RMB (renminbi) and CNY (Chinese yuan) refer to China’s currency but serve different purposes and contexts.
Renminbi is the official name of China’s currency, translating to ‘the people’s currency.’ It is a broad term encompassing all currency uses within China and in international contexts.
When discussing China’s overall currency system, RMB is the appropriate term. It represents the entire monetary system, similar to how the term ‘sterling’ refers to the UK currency system, which includes pounds and pence.
On the other hand, the Chinese yuan is the specific currency unit used in most financial contexts, particularly in trading and currency conversion.
The abbreviation CNY is used in financial markets to denote the yuan as the base unit of the currency. The yuan is the primary unit within the RMB system and is divided into smaller units called jiao and fen.
In practical terms, RMB refers to the currency in general terms or its official status, and CNY is typically employed when discussing exchange rates, international transactions, or financial trading.
For example, in the forex market, currency pairs such as USD/CNY indicate the exchange rate between the US dollar and the Chinese yuan.
Usage & Accessibility
In mainland China, the CNY is used for various transactions. Consumers use it to purchase goods and services, pay utility bills, and settle everyday expenses.
Businesses use it for commercial transactions, payroll, and raw materials and products procurement. Additionally, the government utilizes the CNY for public expenditures, infrastructure projects, and social services.
These platforms are widely accepted in retail stores, restaurants, taxis, and street vendors, making the CNY highly accessible for everyday use. Traditional banking services facilitate accessibility, with numerous ATMs, bank branches, and online banking services available nationwide.
For international transactions, while foreigners can exchange CNY within mainland China, it is subject to capital controls. These controls restrict the amount of CNY somebody can take out of the country and regulate foreign exchange transactions. This regulatory framework manages the flow of funds and maintains financial stability.
Economic Significance
The CNY is economically significant domestically and globally, reflecting China’s status as the world’s second-largest economy. Its stability is crucial for maintaining economic growth, controlling inflation, and ensuring financial stability.
Globally, the CNY plays a vital role in international trade and investment. As China is a major global exporter and importer, many trade agreements and contracts are settled in CNY, particularly with Asian countries and those involved in China’s Belt and Road Initiative (BRI).
This growing use of the CNY in global trade reduces reliance on the US dollar and enhances China’s economic influence. The US dollar maintains a significant lead, accounting for 62% of global foreign exchange reserves, international debt, import invoicing, and a substantial share of foreign exchange turnover and global payments (around 43% and 39%, respectively).
However, the CNY’s inclusion in the International Monetary Fund’s Special Drawing Rights (SDR) signifies its recognition as a global reserve currency, encouraging central banks and financial institutions to hold it in their reserves.
China’s financial markets have become more accessible to foreign investors, increasing demand for CNY-denominated assets. This influx of foreign investment strengthens the CNY and integrates China more deeply into the global financial system.
The PBoC’s monetary policy, which includes managing interest rates, reserve requirements, and open market operations, directly impacts the CNY’s value and liquidity. By controlling these factors, the PBoC influences economic growth, inflation, and financial stability, making the CNY integral to China’s economy and the global economic landscape.
Regulation & Control
The PBoC regulates the CNY through direct and indirect monetary policy tools designed to maintain stability and control over the currency’s value.
One primary method is setting the daily reference rate, known as the ‘central parity rate,’ against a basket of currencies.
The PBoC announces this rate each day, and the CNY is allowed to fluctuate within a specified band around it, typically 2% in either direction. This mechanism helps the PBoC manage volatility and ensures the CNY remains relatively stable.
The PBoC also actively intervenes in the foreign exchange market to influence the CNY’s value, which involves buying or selling foreign currency reserves to either support or weaken the CNY as needed.
The PBoC also employs various monetary policy tools to regulate the CNY. These include adjusting interest rates, altering the reserve requirement ratio for banks, and using open market operations.
By manipulating these levers, the PBoC can influence liquidity in the banking system, control inflation, and guide economic growth, all of which indirectly impact the value of the CNY.
CNY Manipulation
In August 2019, the US Treasury Department designated China a “currency manipulator” following a depreciation of the CNY against the US dollar, marking the first such designation since 1994.
While the label carries symbolic weight, it has limited practical consequences for China. The move aimed to pressure China on trade practices rather than impose direct sanctions.
The US, seeking to reduce its trade deficit, may be interested in a weaker dollar. A weaker currency can make US exports cheaper globally, potentially boosting exports and reducing the trade gap.
Economists generally believe trade imbalances tend to self-correct over time through currency adjustments. A country’s exchange rate is balanced in the short term when its net capital inflows or outflows offset its current account deficit or surplus.
For example, the US could finance a current account deficit through foreign investment (debt, equity, deposits, loans) without causing significant currency depreciation.
Bottom Line
The CNY is the official currency used for all domestic transactions within mainland China. The PBoC tightly regulates it to maintain economic stability. Its exchange rate mechanism, usage, and economic significance make it a key player in China’s economy and global financial markets.
Understanding the CNY’s role and the differences between CNY and CNH is crucial for anyone trading or investing in Chinese assets. Notably, if you want to speculate on the Chinese yuan through online trading platforms, you’ll usually need to trade the CNH.
Recommended Reading
Article Sources
- People's Bank of China (PBoC)
- China's Massive Belt and Road Initiative - CFR
- Special Drawing Rights (SDR) - IMF
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